By David Oakley
Eurozone banks borrowed more than 8bn euros from the European Central Bank overnight on Thursday, the highest amount since March, in a sign of the deep strains in the financial markets.
Traders said it highlighted the inability of virtually all eurozone banks, with the exception of the very strongest, to get funding from the markets.
One trader said: ?Just look at my screen. It tells the story. I have one big European bank willing to lend and 40 banks wanting to borrow. And look at those names, they aren’t little regional banks. They are some the biggest banks in the eurozone and they can’t get funding in the market place. They have to go to the ECB.?
Other traders said the spike might be an exceptional, one-off. For them, it is worrying, but only extremely serious if the high level of borrowing from the ECB continues. In that instance, then in the eyes of some it suggests the private lending markets for eurozone banks has more or less broken down.
The ECB emergency lending facility saw 8.64bn euros loaned to eurozone banks on Thursday – the highest since spikes in March when crippled Irish banks were forced to turn to the central bank for large amounts of cash.
The depth of the funding problem for nearly all eurozone banks highlights why central banks were forced to take emergency action this week by reducing the cost of borrowing dollars.
The cost of dollar funding for European banks has shot up this week to levels last seen in October 2008 in the wake of the collapse of Lehman Brothers.
For eurozone banks needing to exchange euros for dollars, the premium or extra cost has leapt to more than a percentage point, stretching even the banks with the strongest balance sheets.
However, elsewhere stresses in the system appeared to be easing. Sovereign bond yields, which have an inverse relationship with prices, were tumbling. Italy, the most distressed market of the big eurozone economies, saw yields dip below the key 6.5 per cent level that investors have long considered the point where country’s debt becomes unsustainable.
It is also significant as the banks have to pay 2 per cent to borrow from the ECB compared with only 0.74 per cent in the market place, a considerable market that puts yet more strains on banks borrowing billions of euros.
Other traders said the spike is a worrying sign, but if this extremely high level of borrowing from the ECB continues, then in the eyes of some it is a sign that the private lending markets for eurozone banks has broken down.
? The Financial Times Limited 2011