The European Central Bank will lend euro-area banks a record amount for three years in its latest attempt to keep credit flowing to the economy during the sovereign debt crisis.
The Frankfurt-based ECB awarded 489 billion euros ($645 billion U.S.) in 1,134-day loans today, the most ever in a single operation and more than economists’ median estimate of 293 billion euros in a Bloomberg News survey. The E.C.B. said 523 banks asked for the funds, which will be lent at the average of its benchmark interest rate -- currently 1% -- over the period of the loans. They start tomorrow.
Europe’s debt crisis has increased the risk of government and bank defaults, making institutions wary of lending to each other and driving up the cost of credit. The E.C.B. is trying to ensure that banks have access to cheap cash for the medium term so that they can keep lending to companies and households. In addition to the longer-term loans, the E.C.B. has widened the pool of collateral banks can use to secure the funds.
Barclays estimates today’s operation will inject 193 billion euros of new money into the system, with 296 billion euros accounted for by maturing loans. The ECB also lent banks $33 billion U.S. for 14 days in a regular dollar offering, up from $5.1 billion U.S. a week ago, and 29.7 billion euros for 98 days.
The euro jumped half a cent to $1.3198 before retreating to $1.3092 in Frankfurt.
Spanish two-year notes extended a decline, snapping an eight-day gain and sending yields 14 basis points higher to 3.49%. Italian notes also dropped, pushing the yield 29 basis points higher to 5.27%.
Yields on government bonds in Italy and Spain fell in the days after the E.C.B. announced the loans on Dec. 8 as banks bought the securities to use them as collateral in today’s tender. French President Nicolas Sarkozy has suggested banks could use the loans to buy even more government debt.
E.C.B. Vice President Vitor Constancio in a Dec. 19 interview predicted "significant" demand for the loans as banks face "very high refinancing needs early next year."
Some 230 billion euros of bank bonds mature in the first quarter of 2012 alone, E.C.B. President Mario Draghi told the European Parliament this week.
"Banks represent about 80% of lending to the euro area," Draghi said. "The banking channel is crucial to the supply of credit." He predicted banks will experience "very significant funding constraints" for the "whole" of 2012.
Banks from the 17-nation euro region need to refinance 35% more debt next year than they did this year, according to a Bank of England study. Lenders have more than 600 billion euros of debt maturing in 2012, around three quarters of which is unsecured, the study says.
The ECB is focusing on greasing the banking system to fight the debt crisis as it resists calls to increase its bond purchases to reduce governments’ borrowing costs. Today’s lending exceeded the 442 billion euros awarded in the ECB’s inaugural 12-month loan in 2009.
The ECB said 123 banks shifted a total of 45.7 billion euros into the three-year loan from an existing one-year facility allotted in October. The central bank will offer a second three-year loan on Feb. 28 and borrowers have the option of repaying the funds after a year.
