Fresh credit crunch fears as banks park record €453bn cash with ECB

• Move suggests banks afraid to lend to each other
• Italy's UniCredit spooks markets with cash call

Fresh fears about the eurozone banking system were raised when record amounts of cash were deposited with the European Central Bank and Italy's UniCredit spooked markets with a cash call on investors.

Some €453bn (£378bn) was lodged in the ECB's "deposit facility" on Tuesday night in a move that some analysts feared showed banks were so concerned about lending it out to rivals that they would rather earn just 0.25% in interest from the central bank.

The ECB also revealed that €15bn had been used from its emergency lending facility overnight on Tuesday, following €14.8bn borrowed the previous day.

Bank stocks retreated from a stronger start to the new year after the Italian bank UniCredit attempted to entice investors to back a €7.5bn cash call by offering a big discount on the existing price of its shares.

"Interbank funding markets are getting more credit crunched, not less," said Louise Cooper, markets analyst at BCG Partners. Referring to the deposits at the ECB, she said: "This shows how much fear there is still in the wholesale markets – that banks prefer to accept only 0.25% interest rate on their cash rather than lending it out at higher rates to other banks.

"Central banks are having to fund banks themselves because so many credit, wholesale and rates markets are not functioning normally and it is getting worse … Equity markets may have started 2012 with a strong start, but as far as the wholesale funding markets are concerned, the world is still a scary place."

Some observers said it was not immediately clear that the deposits to the ECB could be equated to the €498bn that banks borrowed from the central bank in last month's three-year loans. Banks might be sitting on the cash in anticipation of needing fresh funds later in the year when their current form of financing, through bonds, would mature.

The rights issue by UniCredit was initially thought to be priced at a 43% discount to its share price, but it later became clear the discount was a massive 69%.

Required to raise extra capital by the European Banking Authority, UniCredit is one of a number of banks that are expected to need to tap their shareholders for cash. Its shares were briefly suspended as they fell following the details of the cash call – which had been signalled at the end of last year – and shares in other banks across the eurozone, such as Commerzbank in Germany, were also dragged lower.

Amid the anxiety about the banking system, Greece kept up the pressure on its eurozone partners to bankroll a new bailout when its prime minister echoed comments from his spokesman, who has warned the country could be forced out of the single currency in the next three months.

Lucas Papademos, Greece's prime minister, told union leaders they need to accept more pay cuts if the country's paymasters were to agree the final terms of its second €130bn bailout.

"If we want to secure our most significant achievements – participation in the euro and avoidance of a massive, vertical income devaluation that a disorderly bankruptcy and exit from the euro would lead to – then we must accept a short-income reduction," he told union leaders.

Officials from the so-called troika are due in Athens on 15 January and Papademos said "the coming few weeks will be extremely crucial".

There were also fears that the eurozone would slip back into recession following the release of purchasing managers' index (PMI) data, a key indicator of economic activity. "The uplift in the eurozone PMI in December does little to dispel fears of the region sliding back into recession," said Chris Williamson, chief economist at Markit.

Sterling hit a 15-month high against the euro while the single currency was at an 11-year low against the yen.

Some analysts were heartened by an auction of government bonds by Germany, which had spooked investors last November when it failed to sell as many bonds as it had hoped at a previous auction. Portugal also issued €1bn of bonds while France is scheduled to conduct an auction on Thursday. Banks such as ING and UBS have also begun to raise cash by selling bonds to finance their operations this year, when it is estimated that about $1tn of bank bonds will mature.

Most of the focus was on the banking sector. UniCredit's €7.5bn rights issue was seen as a test of investor appetite for bank shares and Joshua Raymond, chief market strategist at City Index, said the larger than expected discount indicated either that shareholders lacked confidence in UniCredit or an act of "desperation" on its part.

The bank said the pricing reflected "current market conditions". Cooper said "the level of discount is psychological, reflecting the fears and worries of investors, trying to tempt them into a bargain".

The Italian bank's need to raise fresh funds to survive the eurozone crisis is second only to Spain's Santander, and the size of the rights issue is more than half its stock market value of €12bn. It is the third time UniCredit has tapped investors for cash since the 2008 banking crisis and its shares have fallen 25% since it announced the share offering in mid-November.

The Financial Times reported that Spain's banks would have to take provisions of €50bn to clean up their balance sheets.


Jill Treanor

The GuardianTramp

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