Euro-area banks tapped the European Central Bank for a record amount of three-year cash in an operation that may boost bond and equity markets.
The Frankfurt-based ECB said today it will lend 800 financial institutions 529.5 billion euros ($712.2 billion) for 1,092 days. Economists predicted an allotment of 470 billion euros, according to the median of 28 estimates in a Bloomberg News survey. In the ECB’s first three-year operation in December, 523 banks borrowed 489 billion euros.
“The astonishing number this time is the number of banks participating, which signals that a lot more small banks looked for the money and it is likely they will pass it on to the economy,” said Laurent Fransolet, head of fixed income strategy Barclays Capital in London, who estimates about 300 billion euros of the total is new lending. “So the impact may be bigger than with the first one.”
Bond and equity markets have rallied since the ECB’s first three-year loan, suggesting banks are investing at least some of the money in higher yielding assets. That’s helped ease concern about a credit crunch and won governments time to agree on measures to contain the sovereign debt crisis. The risk is that banks become too reliant on ECB money and fail to take the steps needed to strengthen their balance sheets.
The euro fell after the ECB announcement to $1.3432 at 11:47 a.m. in Frankfurt from $1.3471 beforehand. German 10-year bunds extended a decline and Italian and Spanish two-year notes held an advance.
“There’s a big difference between stopping the rot and starting a recovery,” said Steve Barrow, head of Group-of-10 research at Standard Bank Plc in London. The loans “might have done the first, but they won’t do the second,” he said.
The economy of the 17 nations sharing the euro is forecast by the European Commission to contract 0.3 percent this year as the debt crisis prompts governments and consumers to cut spending. The ECB’s loans are intended to relieve liquidity strains and grease the flow of credit to households and businesses, boosting growth.
A byproduct has been the so-called “Sarkozy trade,” where yield-hunting banks use some of the cash to buy sovereign bonds -- an idea first floated by French President Nicolas Sarkozy.
Since the first three-year loans were awarded on Dec. 21, the yield on Spanish two-year bonds has fallen to 2.24 percent from 3.6 percent, while the Italian equivalent has dropped to 2.14 percent from 5 percent. The Euro Stoxx 50 Index of stocks is up 9 percent this year.