Euro crisis sends Spanish banks scampering to ECB

The euro-zone crisis last month closed the tap on the wholesale fund markets for Spanish lenders, driving them into the arms of the European Central Bank for much-needed liquidity.

According to figures released Wednesday by the Bank of Spain, local lenders tapped the ECB for 97.97 billion euros in November, the highest amount since September of last year. The amount borrowed was up 28 percent from October and up 59 percent from November 2010.

The extent of the liquidity problems faced by Spanish lenders was evidenced by the fact that funds extended by the ECB accounted for 26 percent of total lending to euro-zone banks, up seven percentage points from October. In normal circumstances, local lenders would be expected to borrow amounts closer to Spain's weighting in the Eurosystem, which is 12 percent.

Total loans disbursed by the ECB last month fell by 7.5 billion euros from October to 375.5 billion, the smallest amount in a year and a half.

The Spanish Treasury last month was forced to offer a yield of over 7 percent on 10-year government bonds for the first time since 1997, before the introduction of the euro. This was accompanied by an increase in the country's risk premium to a euro-era record high of almost 500 basis points as investors feared the single-currency bloc was on the point of falling apart.

The spread between the yield on the Spanish 10-year government bond and the German equivalent closed Tuesday up 9 basis points at 376 basis points. Up to 26 European Union countries agreed at a summit last Friday to move toward fiscal union, with only Britain opting out.

The extent of mutual mistrust among Europe's banks was clearly seen in lenders opting to park excess liquidity in low-interest deposits with the ECB rather than in the interbank market. Deposits with the ECB last month increased 17 percent to 224.1 billion euros, the biggest amount since June of last year. ECB deposits last month carried an interest rate of 0.5 percent but that fell to 0.25 percent after the bank cut its key lending rate to 1 percent.

The ECB also moved to ease liquidity by offering three-year loans for the first time ever while accepting lower-grade assets as collateral.