* Banks take slightly more than expected at second LTRO
* Total of 800 banks tap the tender
* ECB policymakers want the second operation to be the last
* Italian, Spanish borrowing costs fall anew
By Paul Carrel
FRANKFURT, Feb 29 Banks grabbed 530
billion euros at the European Central Bank's second offering of
cheap three-year funds on Wednesday, fuelling expectations that
credit will flow to businesses and borrowing costs will ease for
governments hit by the euro zone crisis.
In the space of two months, the ECB has now injected over a
trillion euros of money into the financial system, banishing the
threat of a credit crunch. The bank hopes Wednesday's move will
be its last major crisis-fighting act.
A total of 800 banks borrowed money, with demand exceeding
the 500 billion euros seen in a Reuters poll and the 489 billion
allotted in the first such operation in December. The uptake was
the largest ever at an ECB liquidity operation.
The ECB unveiled the funding operations, known as LTROs,
late last year to counter frozen interbank lending and dampen
tensions on euro zone bond markets that threatened to tear the
Positive investor reaction to the second round suggested the
ploy should continue to buoy markets although central bank
sources have told Reuters the ECB is not inclined to offer a
"You can't argue with 529 billion," said Peter Chatwell at
Credit Agricole CIB. "It's undoubtedly positive for risk assets
and also will help to support core markets as initially banks
need somewhere to store the resultant excess liquidity."
The euro dipped to a session low against the dollar
in volatile trade while European stocks gained and safe-haven
German Bunds fell in response as risk appetite increased.
Breaking down the headline number, the ECB's move pumped
over 300 billion euros of additional cash into the banking
system. The additional 230 billion went towards rolling over
central bank loans banks had taken previously.
Much will now depend on what banks do with the cash. They
used a big chunk of the 489 billion euros they borrowed first
time around to cover maturing debt and have been parking close
to half a trillion euros at the ECB in overnight deposits.
ECB President Mario Draghi, whose native Italy was at the
epicentre of the crisis when the bank announced the measure late
last year, said after the first of the operations that "a major,
major credit crunch" had been averted.
Draghi has urged banks to lend out funds from
Wednesday's LTRO to households and businesses, helping
strengthen economic growth. ECB officials hope banks will also
buy higher-yielding bonds more aggressively, especially from
Evidence suggests banks especially in Spain but also in
Italy used the first LTRO to ply the "Sarkozy trade" - a term
adopted by markets after the French president suggested that
governments urge banks flush with ECB cash to buy their bonds.
Wednesday's take-up suggests that will continue.
The take-up by Italian banks was on "a similar scale" to the
116 billion euros they took at the first offer, a senior Italian
banking source told Reuters.
Intesa Sanpaolo, Italy's biggest retail bank, took
24 billion euros of the money handed out, double the amount it
tapped in December, and said part of the cash would be used to
buy Italian government bonds.
Spain's Banca Civica said it took 6.1 billion
euros and that it would use some of the money to buy more debt.
Italian and Spanish borrowing costs extended their falls
after the bumper take-up of ECB largesse.
The fact that 800 banks used the latest LTRO - compared with
492 in December - suggests that a greater number of smaller
banks gained access to funding, helped by the ECB's decision to
expand the range of eligible collateral.
Italy faces a debt issuance hump in the next few months and
will take any help it can get. It needs to sell around 45
billion euros of its bonds a month in both March and April
versus 19 billion in February.
Nonetheless, sources have told Reuters the central bank
wants the second LTRO to be the last, as it is worried banks are
becoming too reliant on ECB funds and wants to throw the onus
back on euro zone governments to tackle the debt crisis.
Banks have already taken more funds from the ECB than ever
before and risk becoming dependent.
Some policymakers say the LTROs are merely masking problems
in crisis-hit euro zone countries on the bloc's periphery.
"The idea that the long term repo operations have eased the
supply of finance to small businesses in the euro area is a
myth," Bank of England Governor Mervyn King told a parliamentary
committee in London.
"What it has done is to provide a source of funding to banks
particularly in the southern member countries of the euro area
which were experiencing a bank run, enabling them to fund the
withdrawal of funds," he said.
Bundesbank chief Jens Weidmann has expressed concern that
"too generous" supply of liquidity could lead to inflation risks
but another ECB policymaker, Athanasios Orphanides of Cyprus,
played down the prospect of the three-year money fuelling price
What is undeniable is that Draghi's gambit has sucked much
of the heat out of the euro zone crisis and given governments
time to work out sustainable budget and growth policies for
affected countries on the periphery of the bloc.
Ratings agency Standard & Poor's said the ECB funding
measures had reduced the risk of liquidity driven bank failure
and averted a severe credit crunch in the euro zone.
"Nevertheless, we consider that the ECB's actions do not
address the underlying structural issues in the banking sector,"
S&P said in a statement, citing capital shortfalls at some banks
and some questionable business models.
Rather than a simple flat rate, the 3-year funds were
offered at an interest rate averaging the interest rate in the
ECB's main one-week refi operations over the next three years.
That rate is currently at a record low of 1.0 percent.
Banks have the option of paying back all or parts of the
loans at any time after one year.
Financial markets are watching to see how effectively
governments use the time the ECB has given them to deliver
growth and sustainable budgets.
"Without growth, the LTROs are a bridge to nowhere," said
Andrew Bosomworth, senior portfolio manager at PIMCO.