Deposits in ECB hit new record
THE lack of trust among Europe's banks was highlighted again yesterday when new figures showed that lenders are parking record amounts of cash with the European Central Bank for safekeeping.
Commercial banks' overnight deposits at the ECB hit a new record high of €453bn, underscoring the continuing fear that banks have about lending to each other.
The banks are depositing excess cash back with the ECB at the overnight rate of just 0.25pc, rather than lending it for more elsewhere.
They are currently awash with funding after taking an unprecedented €489bn in the ECB's first-ever three-year liquidity operation late last month.
That move was designed to underpin banks' finances and boost confidence, but many institutions still lack the trust to lend to each other.
The €453.2bn on deposit yesterday -- 65pc of all the money the ECB is lending to banks -- topped the previous record of €452bn that was reached last week.
The ECB is worried that the eurozone could see a credit crunch and has responded by flooding the money market with cheap cash.
Worries over the eurozone debt crisis and the region's banks hit global stocks and boosted the dollar yesterday.
Fears were stoked further after Italian lender UniCredit priced a rights issue at a discount of 69pc to its closing share price on Tuesday.
The capital increase, which was meant to shore up its ravaged balance sheet, sent shares in Italy's largest bank (by assets) down 8.5pc.
The FTSEurofirst 300 index of top European shares was down 0.6pc points after hitting a five-month high on Tuesday, when strong manufacturing data from the US and China helped boost risk appetite.
The STOXX Europe 600 Banking eurozone index, which has many constituents exposed to the debt crisis, fell 2.9pc.
As concerns remain over the financial crisis, German officials said yesterday that Chancellor Angela Merkel would host Italian Prime Minister Mario Monti for talks on the European economy in Berlin next Wednesday.
The leaders will meet in the morning and hold a joint press conference at lunchtime, government spokesman Georg Streiter told reporters in Berlin.
They will discuss foreign affairs and economic developments, the spokesman added.
Mrs Merkel will host French President Nicolas Sarkozy on Monday, two days before Mr Monti, to prepare a European summit planned for the end of the month.
Italy's chronically weak economy over the past two decades has been one of the main factors in creating a debt burden that is now around 120pc of gross domestic product, second only to Greece in the eurozone.
Rigid labour rules -- which give some workers iron-clad guarantees, while forcing increasing numbers of young people to accept short-term jobs with few prospects -- an inefficient public sector, low productivity and choking red tape have long weighed on the economy.
Italy is widely considered to be heading for a severe recession this year, with business confidence at its lowest for two years and orders falling.