The European Central Bank’s balance sheet soared to a record 2.73 trillion euros ($3.55 trillion) after it lent financial institutions more money last week to keep credit flowing to the economy during the debt crisis.
Lending to euro-area banks jumped 214 billion euros to 879 billion euros in the week ended Dec. 23, the Frankfurt-based ECB said in a statement today. The balance sheet increased by 239 billion euros in the week and was 553 billion euros higher than three months ago.
The euro weakened and stocks fell, halting a five-day advance in the Standard & Poor’s 500 Index, as the announcement highlighted risks from Europe’s debt crisis.
“The market reaction is slightly incomprehensible,” said Jens Kramer, an economist NordLB in Hanover. “After that record liquidity injection it would follow that the balance sheet would swell. Seeing the figure in black and white, and the fear of what would happen to the ECB if a country defaulted, may have spooked the market.”
The ECB last week awarded 523 banks three-year loans totaling a record 489 billion euros to encourage lending to companies and households and prevent a credit shortage. Barclays Capital estimates the loans injected 193 billion euros of new money into the system, with 296 billion euros accounted for by maturing loans. So far, banks are parking the money back at the ECB. Overnight deposits at the central bank increased to an all- time high of 452 billion euros yesterday.
The S&P 500 declined 0.8 percent to 1,255.01 at 10:30 a.m. in New York and the Stoxx Europe 600 Index fell 0.5 percent, reversing a 0.6 percent advance. The euro slid more than a cent $1.2952 at 3:41 p.m. in London and reached an almost 10-year low versus the yen.
If the balance sheet release was the reason for the euro’s decline, “it shows you how thin the market is at the moment,” said Eric Wand, a fixed-income strategist at Lloyds Bank Corporate Markets in London. “Nobody who’s following the ECB should be surprised that the balance sheet is at that level as it has been continuously adding liquidity. Almost three trillion is a relatively elevated level, but it is collateralized lending, so it’s not a huge concern at the moment.”
The ECB this month cut its benchmark interest rate to 1 percent, matching a record low, as the debt crisis threatened to engulf Italy and Spain, the euro area’s third- and fourth- largest economies. Growth in the 17-nation euro region will slow to just 0.3 percent next year from about 1.6 percent this year, the ECB forecast this month.
ECB policy makers have resisted calls to step up their government bond purchases to cap borrowing costs in Europe’s peripheral nations, choosing instead to grease the region’s financial system with unlimited cheap loans.
In addition to offering longer-term funds, the ECB has also widened the pool of collateral banks can use to obtain the cash. The central bank will offer a second three-year loan on Feb. 28.
Italy today sold 9 billion euros of six-month Treasury bills, meeting its target, and its borrowing costs plunged in a sign that banks may channel some of the ECB’s money into debt markets.
The Rome-based Treasury sold the 179-day bills at a rate of 3.251 percent, down from a 14-year-high of 6.504 percent at the last auction of similar-maturity securities on Nov. 25. Investors bid for 1.7 times the amount offered, up from 1.5 times last month.
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