The European Central Bank's second unlimited three-year loan allotment far exceeded expectations on higher demand, limiting the threat of a credit crunch.
The central bank provided a record EUR 529.53 billion ($712.4 billion) in the 1092-day long term refinancing operation (LTRO) for banks on Wednesday. Economists had expected a figure between EUR 470 billion to EUR 500 billion.
The massive injection is expected to improve liquidity and reduce the cost of funds. Today's operation was conducted as fixed rate tender with full allotment.
The operation will provide further vital support for the euro-zone's beleaguered banking sector, Capital Economics Senior European Economist Jennifer Mckeown said. But, she doubts that they will alter the underlying outlook for the wider economy or bring an end to the peripheral debt crisis.
In the first offering of 3-year loans on December 21, 2011, the bank gave EUR 489.19 billion at 1 percent interest, which helped cash-strapped lenders to refinance maturing bonds. In 2009, the central bank alloted EUR 442 billion in one-year loans.
The number of banks bidding for the long term funds increased sharply from December. The latest offering saw 800 banks bidding, up from 523 banks in the December operation.
The broadening of the pool of collateral allowed more small and medium sized banks to tap the special three-year funding scheme, ING Bank NV's economist Martin van Vliet said.
Higher number of participating banks might also indicate fresh demand from banks that did not participated in "LTRO 1" because of reputational considerations, but concluded that it was an offer they could not refuse after all, the economist observed.
The cheap loans are offered to banks so as to restrain them from curbing loans to businesses and consumers as well as to ease fears of banks running out of money. So far, instead of lending, banks are parking additional funds at the central bank.
The ECB move in December was largely successful as it reduced yields of Italian and Spanish bonds and business sentiment improved.
Demand from Greek banks will likely have been subdued, the ING economist said. Yesterday, the ECB temporarily suspended the eligibility of Greek bonds as collateral in monetary policy operations after Standard and Poor's downgraded its rating on Greek sovereign debt to 'selective default'.
The agency also lowered the outlook on the bailout fund European Financial Stability Facility to 'negative', indicating a rating downgrade within the coming two years.
by RTT Staff Writer
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