Eurozone banks are increasingly tapping emergency central bank funding in a sign of growing problems in the region’s financial system. Eurozone banks deposited €346.4bn, the most since June 2010, at the European Central Bank on Monday night, the latest figure, suggesting banks are hoarding money instead of lending to rivals because of fears of counter-party risk.
The continent’s banks are also heavily relying on emergency borrowing facilities offered by the ECB. Overnight lending at the central bank, which incurs a penal interest rate and has been high for almost two weeks, hit almost €9bn on Monday. One trader said: “The financial system is no longer functioning properly. Very few banks can get short-term loans in the private markets. It is only a handful of the very biggest and strongest banks that can.”
He also pointed to demand for loans at the regular seven-day ECB tender, which rose to €291.6bn, the highest in more than two years, as another sign of the strains in the market. However, the eurozone sovereign bond markets were relatively calm amid light trading. Italian and Spanish 10-year bond yields were up marginally on the day at 7.13 per cent and 5.74 per cent for 10-year debt, according to Reuters. There were also a relatively successful set of auctions from Spain, Belgium and the European Financial Stability Facility, the eurozone rescue fund.
Spanish and Belgian short-term borrowing costs dropped at short-term debt auctions. Spain’s Treasury sold €4.9bn of 12-month and 18-month bills, above the top end of the targeted range, at rates of almost 1 percentage point below the 14-year highs seen in a similar auction in November. “While representing a clear improvement on the last auctions, today’s yields remain elevated and, hence, in terms of contagion risk, these sales represent a temporary stay of execution,” said Richard McGuire, senior fixed income analyst at Rabobank. “For a more lasting improvement in Spanish debt sustainability, a circuit breaker at a systemic level is required.”
Yields on Belgium’s short-term debt dropped more than 140 basis points to 0.78 per cent from a month earlier when it raised €1.1bn for a March 2012 bill amid strong demand. Sentiment has been helped by the formation of a new government last week. The EFSF raised €2bn in three-month bills at yields of 22 basis points for the rescue of Portugal and Ireland. Yet, in spite of the relative calm in the sovereign bond markets, many investors and strategists continue to worry about bank funding. Many say the ECB needs to defuse tensions in government debt markets by escalating its bond purchases.