European banks could ask for more than a trillion dollars in loans from the European Central Bank (ECB) next month, reported the Financial Times on Monday, as the ECB prepares for a second money auction designed to avert a possible credit crunch.
Last month, the ECB lent banks an unprecedented 489 billion euros ($637 billion) as part of its emergency funding scheme. The sum is expected to be paid back over the next three years, with some analysts suggesting that the banks had used some of this money to invest in higher-yielding eurozone sovereign bonds.
However, several of Europe’s biggest banks have already indicated that they could double, or even triple, their monetary requests at ECB’s upcoming three-year money auction on February 29th, as companies struggled to find investments from external sources.
“People aren't prepared to lend to the banks, so the ECB is just flooding the market with liquidity,” said Christopher Wheeler, an analyst at Mediobanca SpA in London, to Bloomberg News. “But it's only a temporary fix. The ECB is only buying time with these loans hoping that things will improve.”
According to one head of a eurozone bank during last week’s World Economic Forum at Davos, “banks are not going to be as shy second time round”, as he acknowledged that the stigma associated with using ECB funds may have put off some banks during the last round of auctions in December.
But, ECB’s president Mario Draghi appears to have helped to assuage banks’ fears – particularly of appearing weak – by persuading as many institutions as possible to participate.
Other politicians, including French President Nicolas Sarkozy, have also been pushing the banks to use the loans due to its extremely low interest rate of 1 percent, in order to purchase higher-yielding European sovereign debt, and thereby forcing down borrowing costs in the region.
The ECB has promised unlimited cash at that interest rate, as lenders try to refinance more than $765 billion of debt that will mature by the end of this year.
During its last auction, Italian and Spanish banks dominated the demand for ECB money, with UniCredit SpA, Italy’s largest lender, taking up to 12.5 billion euros ($16.48 billion) alone. In total, Italian and Spanish banks took more up more than half of the money that was on offer the last time.