Banks turned to the safety of the ECB as eurozone debt tensions intensified on Tuesday, hoarding over 90 billion euros at the central bank and borrowing heavily in its weekly funding handout. Banks took 154 billion euros ($219 billion) in the ECB's weekly 7-day refinancing operation, well above the 134 billion traders had expected and the 120 billion they took last week.
Participation was also high with 230 banks taking funding compared to 185 last week, although it was within the range of recent months. At the same time, banks parked 90 billion euros at the ECB overnight, the highest since February and a further sign of the reluctance hampering interbank lending markets.
While the hoarding is likely to be exaggerated by timing -deposits traditionally spike at the end of the ECB's reserves period - traders said the recent intensification of the debt crisis was influencing behaviour. "It is a sign of the times," said one top money market trader, who asked to remain anonymous. "The reason it is so large is that people have front loaded reserves this period because of the situation."
The euro zone debt crisis now appears to be sucking in Italy and Spain, two of the bloc's biggest economies. The cost of insuring against default in Spain, Portugal and Greece hit a record high on Tuesday and 10-year bond yields in Italy, the eurozone's third-largest economy, shot above six percent for the first time since 1997, well above what bankers view as sustainable.
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