Eurozone banks park record amount of funds at ECP

The data suggested ongoing tensions in the financial system despite unprecedented injections of liquidity last week.Banks put 452.03 billion euros ($590.6 billion) on deposit for 24 hours at the ECB overnight Tuesday, beating the previous record of 411.8 billion euros set only the day before.Rising levels of deposits at the ECB bank are seen as a sign of market tension, since the money deposited earns an interest rate of 0.25 percent, much less than the rate available on the interbank market.Thus, heavy use of the facility suggests banks favour parking the money at low interest with the ECB rather than lending it to each other.The phenomenon appears particularly significant this week because it comes just days after eurozone banks borrowed a nearly half a trillion euros from the ECB in a brand-new three-year lending facility.The ECB agreed to loan a record 489.2 billion euros to 532 banks last week in the longest-ever refinancing operation in a move to avert a possible credit crunch.It was an unusual but necessary step to maintain the flow of credit into the real economy, Bundesbank chief and ECB governing council member Jens Weidmann told the weekly magazine Stern in an interview to be published on Thursday.The loans were meant to bridge a shortfall for banks that will only be back on a solid footing once the debt crisis has been resolved, Weidmann said.Analysts were nevertheless wary about reading too much into the high level of bank deposits with the ECB at this time of year, since it could be due to seasonal factors, where banks traditionally require lots of liquidity at the over Christmas and New Year.Neil Mellor at BNY Mellon Global Markets Research said it was too early to come to any conclusions about the success of the ECBs long-term refinancing operation.But Luca Cazzulani, a strategist at Italian banking giant UniCredit, suggested that some of the ECB cash may have been used to buy up Italian bonds in a key auction this week.Italy paid sharply lower rates on Wednesday to raise 9.0 billion euros ($11.8 billion) in a six-month bond sale.The sale was being seen as a bellwether for market sentiment on the eurozone at the end of a year in which borrowing costs have spiked to record highs over fears that the euro itself could disintegrate because of high debt levels.Wednesdays rate was 3.251 percent -- half the 6.504 percent paid for a similar operation in November and also lower than the 3.535 percent in October.The sale was a sign that market tensions have considerably eased from a month ago and that European Central Bank liquidity may be working to support demand, said Cazzulani at UniCredit.On the other hand, BGC Partners analyst Howard Wheeldon was less convinced.What the ECB did in terms of providing new liquidity is great as far as it goes -- but clearly it has done nothing to ease the visible concern of markets, he said.The real worry now is that, as interbank trade remains non-existent, we go into 2012 facing a real threat to liquidity availability for banks -- and that will then feed through into the wider economy.At the Bundesbank, Weidmann reiterated the ECBs opposition to the central bank doing more to resolve the crisis, such as expanding its own programme of purchasing the sovereign bonds of debt-mired countries.Financing public debts with the money printing press would over time burden the modest saver and the person with low income, Weidmann told the magazine Stern. –AFP