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UK banks take over €37bn in ECB loans

Lloyds Banking Group was the largest borrower, drawing down €13.6bn from the ECB, while HSBC and Royal Bank of Scotland borrowed the remaining €18bn between them

British banks have taken more than €37bn (£31bn) of cheap loans from the European Central Bank following last week’s dash by European banks to bolster their depleted reserves .

Barclays on Friday confirmed it borrowed €8.2bn as major financial institutions across the continent took their borrowing from the European Central Bank’s Long Term Refinancing Operation (LTRO) to more than €1tn.

Lloyds Banking Group was the largest borrower, drawing down €13.6bn from the ECB, while HSBC and Royal Bank of Scotland borrowed the remaining €18bn between them.

Some 800 financial institutions, more than a third of the 2,267 registered to borrow from the ECB, took part in the operation last Wednesday.

There was surprise in some quarters that British banks took the opportunity to access the ECB’s second three year lending facility, but all four of the UK’s major have operations in the eurozone.

Barclays said it applied for the loans to shore up the financial position of its beleaguered subsidiaries in Spain and Portugal. Lloyds is expected to use the cash to underwrite loans it is running down in Ireland, the Netherlands and Spain.

The move came as the ECB faced criticism from the German finance ministry for doubling the size of its loan scheme from the €500bn it lent to banks in December.

The LTRO scheme proved hugely popular with banks under pressure from a second credit crunch. The euro crisis before Christmas triggered the almost complete closure of the inter-bank loan market that was only eased by the ECB’s lending initiative.

Many economists expected a second LTRO scheme to prove less popular after market tensions eased during January and February. However the attraction of loans at 1% from a lender of the ECB’s considerable stature proved irresistible.

The scale of long term bank lending with the central bank came as the ECB said overnight deposits soared to a record.

Financial institutions parked €777bn with the Frankfurt-based ECB, which is the highest figure since the euro was founded in 1999 and up from €475bn a day earlier. Banks get 0.25% interest on the deposits.

ECB president Mario Draghi, apparently reacting to German pressure to limit his operations, warned eurozone leaders against complacency. He said they should not expect a further injection of long-term cash into their banks.

Addressing a dinner late on Thursday at an EU summit in Brussels, Draghi said the €1tn of loans had only won the single currency a temporary reprieve and there could be no let-up in reforms.

Bundesbank chief Jens Weidmann, previously a top adviser to German chancellor Angela Merkel, wrote to Draghi last month to express concerns about risks stemming from the strategy. Other ECB policymakers have similar qualms, saying it could fuel imbalances in the euro area and stoke inflation.

The ECB move has allowed the eurozone three years to push through reforms to rigid labour markets and pension guarantees designed to stabilise economies ravaged by the financial crisis.

Brussels has informed each member state that it must bring down its debt to GDP ratio each year by an agreed amount.

Spain said earlier this week that it would miss debt targets set for 2012 and began to lobby for an easing of the levels set until 2015.

Spain has taken centre stage in the eurocrisis after dramatic spending cuts by Italy’s new technocratic government sliced the country’s deficit.

While several experts said the Italian austerity measures would cause the country crippling problems in subsequent years in terms of lost output and high unemployment, the policy won praise from the traders on the international debt markets.

The Italian bond yield, which priovides a guide to the interest rate the government must pay and the risk it poses to lenders, dropped below Spain’s for the first time since last August.

Spain has struggled to bring its spending under control following a shift to regional government that has enhanced the power of local politicians. Madrid has conducted a guerilla war with several regions in an effort to clamp down on budget breaches.

The newly elected right wing government of Mariano Rajoy is keen to liberalise restrictions on labour and offer tax breaks to small businesses, but knows these moves will take several years to show up in the output figures.

Rajoy said Spain’s deficit would be 5.8% of total economic output in 2012, higher than its agreed target of 4.4%.

He said the higher target still represented “significant austerity”.

“I’m backing austerity and aim to reduce the deficit from 8.5% [in 2011] to 5.8%,” said Mr Rajoy.

But the Netherlands also said it would miss its budget target for this year, with a deficit of 4.5%. The Dutch target was 4.1%. And Brussels will be keen to enforce its new rules on both countries.

Greece could also miss deficit reduction targets for this year as its economy deteriorates and tax income tumbles. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds