FT: Demand for ECB loans rises to €489 billion

21 December 2011

The stronger-than-expected demand, a record for the amount allocated in a single ECB liquidity operation, came after banks were urged by policymakers to take the funds as part of a concerted effort to ease severe strains across the financial system.

The offer of unlimited three year loans, announced this month, comes ahead of a crucial first quarter of 2012 for the eurozone, when a large volume of bank and government debt is due for refinancing. The outcome was initially cheered by markets, with the euro and equities surging on hopes it would help ease banks’ stretched balance sheets, but enthusiasm later waned.

Markets have been debating whether the banks will use the cheap loans to buy higher yielding government debt in a classic “carry trade” rather than finance existing assets.

French banks were encouraged by the Bank of France to take advantage of the new ECB facility. BNP Paribas, France’s largest bank, was understood to be among the banks taking part, although it and its main rival, Société Générale, declined to comment. But one bank official said the funds would be used to finance clients in the “real economy” – not to load up on sovereign debt.

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