(Updates with government bond yields in eighth paragraph.)
Jan. 23 (Bloomberg) — European banks, shunned by investors and each other, may borrow as much next month from the European Central Bank as they did in a record offering in December as they seek refuge from frozen funding markets.
The ECB last month lent banks an unprecedented 489 billion euros ($637 billion) for three years. Analysts said they expect demand to be just as high at a second auction on Feb. 29 because the stigma associated with using the facility is dissipating and the list of what assets can be used as collateral in exchange for the loans will be extended. ECB President Mario Draghi said last week he expects demand for loans next month to be “still very high,” though “probably lower than in December.”
“February’s second three-year Long Term Refinancing Operation looks set to be extremely large,” Credit Suisse Group AG analysts led by William Porter wrote in a report to clients. “The last LTRO has removed any stigma, making managements who do not exploit the value on offer arguably careless at best.”
The ECB is flooding the banking system with cheap money in a bid to avert a credit crunch after the market for unsecured bank debt seized up and funding from U.S. money markets dries up. Politicians, including French President Nicolas Sarkozy, are pushing the banks to use the loans, which carry an interest rate of 1 percent, to buy higher-yielding southern European sovereign debt, thereby forcing down borrowing costs in the region.
The ECB is offering banks unlimited cash as lenders try to refinance more than $765 billion of debt that matures this year, just as institutional investors remain reluctant to buy debt from all but the safest banks.
‘Flooding the Market’
“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. “But it’s only a temporary fix. The ECB is only buying time with these loans hoping that things will improve.”
Lenders in Italy, Spain and France are using the loans to purchase more of their domestic government debt to profit from the difference between the interest rate on the ECB money and the higher yield on sovereign securities, analysts said.
Two-year Spanish and Italian notes have rallied since the ECB said on Dec. 8 it would offer banks unlimited three-year money in exchange for eligible collateral. Yields on two-year Spanish notes have fallen 178 basis points to 3.14 percent while their Italian equivalents fell 269 basis points to 3.54 percent. Longer-dated securities underperformed shorter-duration notes on concern austerity plans won’t plug deficits and reduce Europe’s debt load.
Italian, Spanish Lenders
Demand from more than 500 lenders in December dwarfed the 293 billion-euro estimate of economists surveyed by Bloomberg News. Half of the loans were taken up by Italian and Spanish lenders, Morgan Stanley analyst Huw van Steenis said in a Jan. 18 report to clients.
Italian banks were the main users, with UniCredit SpA, the country’s largest lender, taking 12.5 billion euros, Intesa Sanpaolo SpA, the second-biggest, accepting 12 billion euros, and Banca Monte dei Paschi Di Siena SpA 10 billion euros, the Morgan Stanley analyst estimated, citing conversations with 50 banks and policy makers. Spokesmen for the three banks declined to comment.
Spain’s Banco Popular Espanol SA took 6 billion euros, while Banco Bilbao Vizcaya Argentaria
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