Frankfurt: Overnight deposits with the European Central Bank rose to a record on Wednesday as the sovereign debt crisis made banks wary of lending to each other.
Banks lodged 320.4 billion euros (Dh1.4 trillion, $394 billion) in the ECB's overnight deposit facility at 0.25 per cent, compared with 316.4 billion euros the previous day, the Frankfurt-based central bank said in a market notice yesterday. That's the most since the start of the euro currency in 1999. Deposits have exceeded 300 billion euros for the past five days.
Banks are parking cash with the ECB amid investor concern that a 750 billion-euro European rescue package may not be enough to stop the crisis from spreading and spilling into the banking sector. The ECB said on May 31 that banks will have to write off more loans this year than in 2009 and their ability to sell bonds may be hampered as governments seek to finance fiscal deficits.
"The banking crisis is back," said Norbert Aul, an interest-rate strategist at Commerzbank AG in London. "The news flow over the past few weeks has spooked banks and since nobody knows how exposed individual financial institutions are, it's deemed safer to park cash with the ECB rather than lend it on."
Tensions
Money market tensions are resurfacing even after the ECB started buying government bonds and said it would offer banks as much cash as they want for up to six months. The measures accompanied the European Union rescue package, agreed on May 10, to counter the worsening debt crisis and promises by Greece, Spain and Portugal to rein in their budget gaps.
Money market rates are rising, with the euro interbank offered rate, or Euribor, for three-month loans yesterday increasing to 0.704 per cent, the highest this year. Banks borrowed 9 million euros from the ECB at the marginal rate of 1.75 per cent, the central bank said.
The efforts by the EU and the ECB failed to allay investor concerns. Fitch Ratings lowered the credit grade of Spain, the euro area's fourth largest economy, to AA+ from AAA on May 28.
