The European Central Bank is likely to extend its emergency loans to the end of the year as Portuguese banks increased demand for its loans, serving to highlight the fragility of the recovery of money markets. Portuguese bank borrowing from the ECB rose nearly 23 percent to 48 billion euros in April, close to record of 49 billion euros reached last August as investor concern about an escalating sovereign debt crisis kept the country's banks sidelined from the interbank market.
The increase came as bank demand for the ECB's weekly loans rose in April though this was largely due to longer-than-usual bank holidays in the United Kingdom resulting in a short ECB reserve manintenance period. However, data from Greece and Ireland has also shown that borrowing by banks from the three countries worst hit by the debt crisis remains high, accounting for 50 percent of total borrowing from the ECB.
Although recent comments from some policymakers have suggested the bank could restart the phasing out process, some traders and analysts argue it will have to prolong the support again with the euro zone debt crisis refusing to abate and money market dysfunction equally stubborn.
Asked if the ECB would change from operations indexed to its main refinancing rate to variable rate tenders in the third quarter this year, most poll respondents in a Reuters poll on Monday said no, with many pointing to the fourth quarter. Thirteen of 21 traders said that the ECB would continue offering unlimited three-month funds through the third quarter, and all but one said they would not end unlimited one-month and seven-day operations.
The recent increase in banks' take-up of weekly ECB loans has raised the cash surplus in the euro system to its highest since early February around 60 billion euros, according to Reuters calculations. This has pushed the liquidity-driven Eonia overnight rate to fix at its lowest in almost a month at 0.59 percent.
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