Italian and Spanish banks accelerated their sovereign debt purchases by a record monthly amount in January, underlining how the use of cheap funding from the European Central Bank has contributed to a bond rally among peripheral eurozone countries.
The ECB’s longer-term refinancing operation, a three-year loan plan, was introduced in December to avert a liquidity squeeze that could have cut bank lending to European companies. More than 500 banks borrowed €489bn in December and the ECB is set to announce how many banks have tapped a second offering tomorrow.
With banks using the 1 per cent money to refinance debt and buy bank bonds, the extent to which LTROs were helping to support sovereign bond auctions or increase lending to companies had been a matter a speculation. But ECB figures yesterday showed that Spanish banks increased government debt holdings by more than €23bn in January while Italian banks bought nearly €21bn – record monthly increases. In December and January, Italian and Spanish banks increased their holdings by 13 per cent and 29 per cent to €280bn and €230bn respectively.