Borrowing by eurozone banks from the European Central Bank has jumped to the highest levels since March, in a sign of deep strains in the financial markets.
Traders said the jump in overnight lending by the ECB highlighted the inability of virtually all eurozone banks, with the exception of the very strongest, to get funding from the markets.
The rise in lending to €8.64bn on Thursday – the latest figure – alarmed some traders. It is the highest daily level since increases in March when crippled Irish banks were forced to turn to the central bank for large amounts of cash.
One trader said: “Just look at my screen. It tells the story. I have one big European [commercial] bank willing to lend and 40 banks wanting to borrow. And look at those names, they aren’t little regional banks. They are some the biggest banks in the eurozone and they can’t get funding in the marketplace. They have to go to the ECB.”
However, there were signs of improving sentiment in the eurozone sovereign bond markets as Italian 10-year yields remained below 7 per cent, a key level, and Spanish yields fell for the second day in a row.
There is a feeling among some strategists that policymakers are starting to realise the gravity of the crisis with hopes rising that next Friday’s European summit will see progress on reforms needed to stabilise the financial system.
Yet this conflicted with the jump in borrowing by banks at the ECB’s marginal lending facility. It is the second day in a row of elevated borrowing and if these levels persist, then it suggests the interbank lending system is close to breaking down, say traders.
It is also significant as the banks have to pay 2 per cent to borrow from the ECB compared with only 0.74 per cent in the marketplace, a considerable mark-up that puts yet more strains on banks borrowing billions of euros.
In a further sign of market nervousness, the amount eurozone banks are parking at the ECB, rather than lending to other banks, has this week surged above €300bn. Use of the ECB’s deposit facility, which pays an interest rate of just 0.5 per cent, hit €314bn on Thursday night, the highest since June last year.
Mario Draghi, ECB president, dropped a clear hint on Thursday that the central bank would react to the escalating bank tensions at its governing council meeting next week. The risk is that banks’ reluctance to provide credit to the real economy will drive the eurozone deeper into recession.
“We have observed serious credit tightening …which, combined with a weakening in the business cycle, does not bode at all well for the months to come,” Mr Draghi told the European parliament. “The most important thing for the ECB is to repair the credit channel.”
Options at next Thursday’s ECB meeting will be offers of loans to eurozone banks lasting as long as three years. The ECB could also broaden the range of collateral banks can use when obtaining liquidity.