Banks Seek Emergency Funds From E.C.B.

Lenders took out €247 billion, or $333 billion, in one-week loans, the E.C.B. said, the biggest amount since April 2009. When banks borrow from the E.C.B., it is usually a sign that they cannot get credit on the open market at reasonable rates.

The sovereign debt crisis has undermined the flow of funds to banks in the euro area by raising doubts about the solvency of institutions with a large exposure to European government debt. In particular, U.S. money market funds have severely cut back lending to European banks in recent months, leading many institutions to turn to the E.C.B.

Compounding the problem, many euro area banks have also had trouble selling bonds as a way to raise money that they can lend to customers, raising the specter of a credit crunch that could amplify an impending economic slowdown. In addition, some banks may fail if they are unable to raise short-term cash.

On Tuesday, the Spanish treasury sold three-month bills priced to yield 5.11 percent, more than double the 2.29 percent yield at a sale of similar securities on Oct. 25. It also sold six-month debt at 5.23 percent, up from 3.30 percent in October.

Euro zone bonds reflected continuing stress. Spain’s 10-year bonds were at 6.57 percent, up 6 basis points, while Italy’s 10-year bonds were up 16 basis points at 6.81 percent. French 10-year bonds were at 3.5 percent, up 6 basis points. A basis point is one-hundredth of a percent.

Wall Street stocks traded weakly and European markets gave up early gains after Spanish debt commanded sharply higher yields and revised data showed that the United States grew less than first thought in the third quarter.

The Euro Stoxx 50, a barometer of European blue chip stocks, lost 1 percent on Monday, while the FTSE 100 pulled back 0.3 percent.

The E.C.B. said that 178 banks asked for loans Tuesday. That compares with the 161 banks that borrowed €230 billion last week. Since 2008 the central bank has been allowing lenders to borrow as much as they want at the benchmark interest rate, which at present is 1.25 percent. Banks must provide collateral, and the E.C.B. is not supposed to prop up banks that are insolvent, only those that have a temporary liquidity problem.

At the same time, the E.C.B. continued to resist calls that it stretch its mandate and expand the money supply, as the U.S. Federal Reserve and Bank of England have done. The E.C.B. has been buying bonds from countries like Spain and Italy to try to hold down their borrowing costs, but the amount — €195 billion so far — is modest compared with the “quantitative easing” employed by other central banks.

A growing number of commentators say the E.C.B. should be able to buy government bonds to stimulate the economy. “It is essential to have a central bank free to use all the levers, including variants of quantitative easing,” Adair Turner, chairman of the British Financial Services Authority, told an audience in Frankfurt late Monday that included Vítor Constâncio, vice president of the E.C.B.

Richard Koo, chief economist at the Nomura Research Institute, wrote in a note Tuesday that “the E.C.B. should embark on a quantitative easing program similar in scale to those undertaken by Japan, the U.S. and the U.K.”

“Doubling the current supply of liquidity would not trigger inflation and would enable the E.C.B. to buy that much more euro zone government debt,” Mr. Koo said.

But there has been no sign the E.C.B. will budge from its position that it is barred from financing governments, and that purchases of government bonds are justified only as a way of maintaining control over interest rates and fulfilling the bank’s main task of keeping prices stable.

“By assuming the role of lender of last resort for highly indebted member states, the bank would overextend its mandate and shed doubt on the legitimacy of its independence,” Jens Weidmann, president of the German Bundesbank and a member of the E.C.B.’s governing council, said Tuesday in Berlin.

“To follow this path would be like drinking seawater to quench a thirst,” he said.

Lucas D. Papademos, the new prime minister of Greece and a former vice president of the E.C.B., met with Mario Draghi, the E.C.B. president, when he visited the bank Monday. The bank did not disclose details of their discussions, but Greece’s fate is to a large extent in the E.C.B.’s hands. Because of its bond purchases, the E.C.B. is the Greek government’s largest creditor, and the E.C.B. is one of the institutions that determines whether Greece will continue to receive E.U. aid.

Meanwhile, U.S. money market funds continue to pull cash out of Europe and especially out of France, according to data published Tuesday by Fitch Ratings. The ratings agency said U.S. prime money market funds had reduced their total exposure to European banks by 14 percent from their exposure at the end of August, and by 37 percent since the end of May. U.S. funds have cut their exposure to French banks by 42 percent since the end of August, Fitch said.

Article source: http://www.nytimes.com/2011/11/23/business/global/banks-seek-emergency-funds-from-ecb.html?partner=rss&emc=rss