Mon, Jan 23, 2012 - Page 5 News List

ECB deposits may signal credit crunch

AFP, FRANKFURT, GERMANY

The Euro sculpture is partially reflected in a puddle on a cobblestone pavement in front of the headquarters of the European Central Bank in Frankfurt, Germany, on Saturday.

Photo: Reuters

Crisis-hit eurozone banks are parking record amounts of cash at the European Central Bank (ECB) for overnight storage, despite low interest rates, indicating to some analysts the threat of a new credit crunch.

Every day seems to bring a new record. On Wednesday, the ECB revealed that banks had handed it a staggering 528 billion euros (US$682 billion), although only earning 0.25 percent on the cash.

In normal times, banks shy away from depositing cash at the ECB, preferring to lend any overnight surplus to other banks, where they win a higher return.

However, analysts say that the crisis has spawned a lack of trust between banks, meaning that institutions are opting to store the money at the ultra-safe ECB rather than take the riskier route of lending it to their peers.

“The distrust between banks is certainly one of the main reasons that the ECB deposit facility is being used so massively,” said Stefan Schilbe, an economist at HSBC Trinkaus.

The trend is all the more baffling as the ECB offered banks last month three-year loans at very low rates of interest, which they greedily snapped up.

In total, 523 eurozone banks borrowed 489 billion euros from the Frankfurt-based ECB. Authorities had hoped the banks would then lend on the cash to businesses and consumers to spark a recovery in the economy.

Politicians, meanwhile, hoped that the banks would use the money to buy the bonds of debt-wracked countries such as Italy and Spain, pushing down their unsustainable cost of borrowing.

However, instead of this hoped-for distribution to the real economy, banks appear to be stocking the cash, perhaps to pay off their own debts, Deutsche Bank analyst Gilles Moec said.

“Maybe some of them have been tempted to deposit their cash at the ECB while waiting to pay off some debts,” he said, adding that banks had seen the three-year loans as a “windfall.”

Eurozone banks have about 200 billion euros of debt to refinance in the first quarter of the year and around 600 billion euros over the whole year.

In addition, authorities are forcing 70 top banks around Europe to increase their capital reserves in a bid to bolster their defenses against the debt crisis, another reason analysts say banks are hoarding their cash.

Moec added that a certain amount of patience was required, as it would take some time for better financing conditions enjoyed by banks to feed through into the economy.

“It takes three quarters for an improvement in banks’ financing conditions to be transferred to the non-financial sector,” he said.

As for ECB President Mario Draghi, he believes that the money is indeed sloshing around in the system as desired.

By offering the unprecedented three-year loans, “we think we have avoided a major credit crunch even though in some parts of the [euro] area, this credit crunch is already on its way,” he told members of the European Parliament.

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