March 5, 2012 / 3:56 PM / in 6 years

Europe economy may see slim gain from supersize funding: poll

BANGALORE (Reuters) - The broader euro zone economy will get only limited benefit from the European Central Bank’s latest funding bonanza because banks are hoarding the money rather than lending it on to businesses and consumers, a Reuters poll of traders suggested.

While the cheap long-term cash from the ECB is credited with easing borrowing costs for Italy and Spain and helping avoid a credit crunch, the impact seems so far to have been limited to financial markets.

Data from the euro zone’s private sector earlier on Monday showed a sharp downturn among Italian and Spanish businesses dragged the currency bloc back into decline last month.

The data will reinforce expectations that the bloc will wallow in a relatively mild recession until the second half of this year and drag on the global economy, as a Reuters poll predicted last month, while the economies of the weakest debtors such as Greece and Portugal will likely contract for much longer.

With interest rates already at record lows, the ECB looked to more unusual methods of encouraging the flow of funds to boost growth.

No fewer than 800 banks took 530 billion euros ($700 billion) combined in cheap three-year money from the ECB last week, partly as insurance from any worsening of the debt crisis and partly because the offer was too good to pass up.

But most of that money has found its way back to the central bank, with lenders parking more than 820 billion euros at the ECB’s overnight deposit facility as of March 2.

This prevents the money from fostering growth in the region, according to a slim majority of traders - 14 of 23 - while nine said the distribution process was longer and it would take time for the funds to stimulate the real economy.

“The money is not flowing into the real economy. It’s just used to safeguard the banks’ own accounts and not to supply credit to corporates or consumers,” said a euro money market trader.

ECB President Mario Draghi urged banks days before the second tender on February 29 to help strengthen economic growth by lending on the money to euro zone households and businesses.

But with uncertainty over growth prospects in the monetary bloc, banks seem reluctant to heed the advice.

“Deposits with the ECB will not reduce until the end of the maintenance period on March 13. It will increase until then, reduce for a couple of days after that and then come back to levels seen now,” the trader said.

The ECB currently earns 1 percent interest on money it lends to banks under its refinancing operations but pays only 0.25 percent on money placed with it in the deposit facility.

The massive liquidity surge in the market after last week’s operations has at least helped push interbank lending rates lower, even though banks remain reluctant to lend to each other.

Three-month Euribor rates, traditionally the main gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks’ appetite for lending, fell to 0.934 percent on Monday from 0.948 percent on Friday, the lowest level since October 2010.

But “if you look at the total money supply in the markets and the reserve requirements of banks, all of the surplus liquidity is placed back with the central bank,” the trader added.

The wider poll of 28 money market dealers showed the ECB will likely allot 30 billion euros at its regular seven-day tender, compared with the 29.4 billion euros that is maturing this week.

The forecasts ranged from 17 billion to 125 billion euros and signaled uncertainty among traders about the main tender, especially after the huge amount allocated in the three-year operation.

ECB WEBSITE www.ecb.int

Reporting by Sumanta Dey; Polling by Ruby Cherian and Somya Gupta; Editing by Ruth Pitchford

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