The ECB puts pressure on the banks

Pressure is mounting on the interbank market, with the reimbursement of a record loan from the ECB to more than 1,000 European banks due to expire on Thursday. Just one year ago, the Frankfurt bank granted an exceptional loan of 442 billion euros at a fixed rate of 1%, in order to support the banking sector in the middle of a financial storm. The central bank had thus extended the term of long-term refinancing operations (LTRO) from three months to one year, while specifying that only three LTRO of this kind would take place. The last took place last December. Ewald Nowotny, one of the members of the ECB's governing council, was thus keen to remind people that the ECB did not intend to provide new one-year loans to the banks.

This is an announcement that is worrying Spanish banks, which have been particularly affected by the drying up of the interbank market in the last few months and which, according to an article in the Financial Times, were lobbying the ECB to renew its one-year operation. The minister of finance Ms Salgado also pointed out this morning that, while the banks would easily manage to repay the sums due on Thursday, they were also hoping that the ECB would be conscious of the necessities of their financial system. "Spanish banks do not have refinancing problems in the short term, but spreads are rather high on two-year rates.

They will probably have more trouble in the medium term", explains Clemente De Lucia, an analyst at BNP Paribas.

However, the ECB has planned to mitigate the operation on Thursday to limit the effect of the massive withdrawal of 442 billion euros on the market. Tomorrow the banks will thus be able to refinance over three months, and on Thursday over 6 days, in order to help the least endowed institutions in particular. These operations will be very closely monitored: a very high demand would mean that access to the interbank market remains restricted, which risks increasing the banks' mutual distrust. Depending on the success of the auction on Thursday, the ECB may be pragmatic: in the last two months, it has already suspended the withdrawal of several unconventional measures, in particular the application of the minimum credit-rating threshold required for Greek bonds to be eligible to be provided by way of security.

In a worst case scenario, the ECB could thus finally decide to extend its one-year loans. "In the event of very strong tensions on the interbank market, the ECB will remain flexible and will adopt the measures necessary to safeguard market conditions. It cannot afford to have an interbank system that doesn't work", explains Clemente De Lucia.