Banks' deposits with the European Central Bank have hit yet another record, data showed today, a day after it insisted its recent unprecedented injections of liquidity have unclogged credit markets.
Banks put €489.9 billion on deposit for 24 hours at the European Central Bank overnight last night, beating the previous record set two days ago of €485.9 billion.
Rising levels of deposits at the ECB bank are seen by some as a possible sign of market tensions since the money deposited earns interest of 0.25%, much less than the rate available on the interbank market. Thus, heavy use of the facility suggests banks favour parking the money at low interest with the ECB rather than lending it to each other.
The phenomenon appeared particularly significant because it came after euro zone banks borrowed a nearly half a trillion euros from the ECB last month in a brand-new three-year lending facility.
At a news conference yesterday, ECB chief Mario Draghi insisted that the central bank's liquidity measures were proving effective in tackling the debt crisis and had so far helped to avert a credit crunch.
"The more time that passes since we had the first three-year long-term refinancing operation, the more we see signs that it has been an effective policy measure," he said.
Under the new long-term refinancing operation, the ECB lent euro zone banks as much as they wanted for a period of three years at super-cheap rates. It was just one of a number of special liquidity measures to keep credit flowing in the 17 countries that share the euro.
Some 532 banks in the region took €489 billion in the first-ever operation in late December. Demand in a second operation scheduled for February was expected to be just as strong, Draghi said.
Nevertheless, there has been concern that instead of lending the money on to businesses, the banks have preferred to park the cash at the ECB instead for fear of possible default. But the central bank chief insisted this was not the case.
"We really see evident signs that this money does not stay in the deposit facility, this money circulates in the economy," he said. "By and large, the banks that have borrowed the money from the ECB are not the same that are redepositing the money with the ECB," he said.
Spain banks' ECB loans highest since July 2010
Borrowing by Spain's struggling banks from the European Central Bank hit a 17-month high in December as it offered cheap long-term loans to the euro zone, the Bank of Spain said today.
The ECB lent Spanish banks €118.86 billion in December, up 21.3% from November, it said. The amount borrowed was boosted by the ECB issuing of three-year loans at one percent so as to inject liquidity into euro zone banks in December.
The amount of loans extended by the euro zone central lender to Spain's troubled banks reached a record high in July 2010, during a major restructuring prompted by the global financial crisis from 2008. It had been steadily falling since, reaching €42.23 billion in April 2011, before rising again from September.
Markets have shown concern in recent months over Spain's financial stability amid fears that the debt crisis which sank Greece and has snagged Italy could spread there. Economists warn that Spain is heading into recession this year. Right-leaning Prime Minister Mariano Rajoy took office last month promising to further reform the banking sector.
His government has warned that Spanish banks will have to make provisions worth €50 billion this year to cover losses on bad property-related assets.
Rajoy has warned that Spain's overall public deficit may exceed 8% of gross domestic product in 2011, far higher than the previous 6% target. He aims to lower it to 4.4% in 2012 through austerity measures.
