* Spain’s banks borrowed in to ECB extra liquidity
* Borrowing from ECB only a short-term fix-analyst
By Paul Day
MADRID, April 13 (Reuters) - Spain’s banks, virtually blocked out of wholesale credit markets, increased their reliance on cheap loans from the European Central Bank in March, borrowing almost double what they did in February.
The financial institutions borrowed a record 316.3 billion euros ($417 billion) from the ECB in March, according to data which knocked European bank share prices and deepened worries about Spain as the next weak spot in the euro zone debt crisis.
The Bank of Spain’s figures, compared with February borrowings of 169.8 billion euros, sent the cost of insuring Spanish debt against default to a record high and came just before Spain tests market appetite for its debt next week.
The ECB has supplied euro zone banks with around a trillion euros of cheap, 3-year loans in two tranches in December and February, a lifeline for battered Spanish lenders struggling to find short-term financing.
However, while the ECB’s liquidity boost has proved an invaluable lifeline for Spain’s banks, it could be only a temporary fix to a deeper problem of heavy property liabilities and fading confidence, economists said.
“Funding conditions have improved on the back of the unlimited liquidity provided by the ECB, but not all that glitters is gold,” Exane BNP Paribas said in an investors note.
“Cheap unlimited liquidity can partly solve short-term liquidity issues but relying on the ECB for funding is, in our opinion, a questionable business model that in the long run demands a higher cost of capital.”
Spain is already thought to have slipped back into its second recession in three years as the economy struggles to recover from the bursting of a property bubble in 2008 which has also left banks fighting to rebuild their balance sheets.
The government has ordered the banks to strengthen capital levels, shattered by the real estate crisis. Their weakness is another factor on top of rising public debt levels and funding costs that could yet force Madrid to apply for European aid.
“High funding costs and patchy access to markets will be key challenges for Spanish banks for some time, adding to the pressure on earnings from stricter impairment charges, higher capital requirements and a challenging operating environment,” ratings agency Fitch said in a note on Wednesday.
Spain has returned to the eye of the storm of the European debt crisis as the new government battles to convince investors it can control its finances and its banks can refinance themselves without public money or European aid.
High financing costs at the end of last year dropped in the first few months of 2012, aided by the ECB’s liquidity lines, but yields jumped again after Prime Minister Mariano Rajoy unilaterally tore up EU-fixed deficit targets early in March.
Spanish government bond yields jumped again on Friday after the banking data, refuelling concerns over the country’s finances before it tests market appetite for its debt next week.
The Treasury is likely to see financing costs spike next week when it issues 12- and 18-month treasury bills on Tuesday and bonds on Thursday. Details of the bonds are due later on Friday.
According to the Bank of Spain data, Spain’s gross bank borrowing accounted for almost 28 percent of total gross borrowing across the euro zone in March, up from around 21 percent a month earlier.
Total net borrowing was 227.6 billion euros in March compared with 152.4 billion euros in February, or almost 63 percent of the total in the euro zone.
The high ratio of Spanish-held ECB lending to the rest of Europe showed how Spain’s lenders were holding on to ECB liquidity for day-to-day operations, while many in Europe were depositing funds back with the central bank.
Madrid has ordered the country’s banks to find more than 50 billion euros this year to protect against potential losses from the property sector crash.
The temporary respite offered by the ECB’s lending could come back to haunt Spain’s banks at a later date if they are not able to clean their balance sheets and start growing soon, one analyst warned.
“While it’s true that the lenders have their debt redemptions covered for 2012 and mostly for 2013, the danger comes when they must repay these liquidity lines in three years time,” financial sector analyst at Madrid-based broker Renta 4, Nuria Alvarez said.
Spain needs at least 20 billion euros ($26.35 billion) to secure the sale of three bailed-out banks and wants the rest of its hard-pressed banking sector to provide the cash in order to avoid putting more taxpayer money into the industry. g