Banks’ cash grab raises hopes of credit for business

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BANKS grabbed 530 billion euros at the European Central Bank’s second offering of cheap three-year funds, fuelling expectations that credit will flow to businesses and borrowing costs will ease for governments hit by the eurozone crisis.

In the space of two months, the ECB has now injected more than a trillion euros into the financial system, banishing the threat of a credit crunch.

A total of 800 banks borrowed money at the tender, with demand exceeding the 489 billion allotted in the first operation in December.

Taxpayer-backed Lloyds confirmed yesterday that it had drawn down £11.4bn in the offering.

The ECB unveiled the funding operations, known as LTROs, late last year to counter frozen interbank lending and dampen tensions on eurozone bond markets that threatened to tear the bloc apart.

Positive investor reaction to the second round suggested the ploy should continue to buoy markets although central bank sources have said the ECB is not inclined to offer a third dose.

Much will now depend on what banks do with the cash. They used a big chunk of the 489 billion euros 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 said after the first of the operations that “a major, major credit crunch” had been averted. Mr Draghi has urged banks to lend out the latest funds to households and businesses, helping strengthen economic growth.

ECB officials hope banks will also use the new money to buy higher-yielding bonds more aggressively, especially from Italy.

Italian and Spanish borrowing costs extended their falls after the bumper take-up of ECB largesse.

Sources have claimed that the central bank wants the second operation to be the last, as it is worried banks are becoming too reliant on ECB funds and wants to throw the onus back on eurozone governments to tackle the debt crisis.

Banks have already taken more funds from the ECB than ever before and risk becoming dependent on those.

Italian banks had taken more than 200 billion euros in central bank funds by January, and those in Spain and France were not far behind.

Some policymakers say the LTROs are merely masking problems in crisis-hit eurozone countries on the bloc’s periphery.

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.

Bank of England Governor Mervyn King said the operation has helped banks in the southern eurozone deal with withdraw- als.