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UPDATE 2-ECB to ensure funding, loan expiry may hurt some-Noyer
June 29, 2010 / 9:49 AM / 7 years ago

UPDATE 2-ECB to ensure funding, loan expiry may hurt some-Noyer

* Noyer says ECB will ensure liquidity buffers in place

* Says some banks might suffer from 12-month loan payback

* Spain’s Salgado urges ECB to consider local banks

* Overall ECB lending close to record highs

(Adds Salgado quotes, changes dateline, adds by-lines)

By Crispian Balmer and Sonya Dowsett

PARIS/MADRID, June 29 (Reuters) - Some banks may suffer after returning 442 billion euros in emergency loans to the European Central Bank this week but the ECB will ensure the payback goes smoothly, Governing Council member Christian Noyer said on Tuesday.

The ECB’s first-ever one-year loans -- part of the emergency support it put in place at the height of the financial crisis -- expire on Thursday and are not set to be renewed, although the ECB has padded the date with extra borrowing opportunities.

Spanish Economy Minister Elena Salgado urged the ECB to be aware of the needs of Spanish banks -- struggling to borrow from others due to concerns over debt and public finances -- although she stressed Spain’s financial system was strong. [ID:nLDE65S0EU]

“The ECB and Eurosystem will do what is necessary to make sure the liquidity is there,” Noyer, who heads the Bank of France, told Europe 1 radio.

“This is an important expiry date ... there are some banks that are in a less good situation that might eventually suffer, but we will make sure that there are no problems and everything goes OK.”

The French central bank chief’s reassurance follows similar comments from Austria’s Ewald Nowotny on Friday as policymakers seek to calm fears that banks’ funding lifeline will be cut off.

To smooth the repayment, banks will have the chance to borrow unlimited funds over three months and six days at a flat rate of 1 percent, the same price as the 12-month loans.

But some banks -- especially in euro zone periphery countries -- are already under pressure and increasingly reliant on the central bank for funds, and it is these lenders which could face stress as they switch from the security of 12-month loans to shorter-term maturities.

The Financial Times reported that Spanish banks were furious the 12-month scheme would not be rolled over and wanted the ECB to offer more longer-term loans.

Concerns about liquidity supply pushed the euro to a lifetime low against the Swiss franc and a 1-1/2-year trough versus sterling. EURCHF= EURGBP=D4


For graph of liquidity, please see:


Full coverage of euro zone debt woes: [ID:nTOPNOW2]



Although market rates have climbed to 9-1/2 month highs ahead of the operation, overall liquidity in euro zone money markets is close to record highs with the ECB reporting 879 billion in outstanding loans on Tuesday. ECBOMO=ECBF

Banks deposited more than a third of this, or 304 billion, back at the ECB overnight ECBDFU=ECBF, suggesting in general that they will not miss the 442 billion to be repaid on Thursday. An extra six-month operation held last month attracted relatively low demand of 36 billion.

Calculations based on ECB data show the excess liquidity in the system is close to record highs at 318 billion and, based on Tuesday’s assessment of banks’ liquidity needs, banks would need to borrow 124 billion in the three-month operation to keep the buffer at current levels.

Money market traders polled by Reuters expected banks to borrow 210 billion, which could actually increase the amount of excess in the system. [ID:nLDE65R1NZ]

Noyer said French banks should not face problems repaying the loans, and said there was no need to panic.

“It is true that this is a big maturity which has caused some disturbances. It partly explains the tensions we have seen generally in the European banking system,” said Noyer.

“You shouldn’t exaggerate things or be excessively worried.”

Worries about bank exposure to shaky sovereign debt is making it difficult for banks in countries including Greece, Spain and Portugal to borrow funds on market, leaving them increasingly dependent on the ECB. [ID:nLDE65M1TF] (Writing by Krista Hughes; editing by Patrick Graham)

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