European banks wait on news of refinancing package

A crucial indication of whether European banks can be taken off "life support" from central banks will come this morning as the European Central Bank (ECB) offers refinancing for a €442bn loan that has kept the system afloat for the past year. Analysts reckon that if the ECB admits that banks have needed to borrow more than €250bn to €300bn then the markets will be concerned that liquidity has once against dried up and that banks are refusing to lend to each other in a potential re-run of the 2008 banking crisis. The rates at which banks lend to each other have already risen to their highest levels in 10 months ahead of the ECB refinancing opportunity amid concerns that some banks would find it difficult to function without the support of the central bank. Spanish finance minister Elena Salgado told local radio that she hoped the ECB would be "aware of the needs of the Spanish financial system". The refinancing by the ECB takes place before tomorrow's deadline for banks to repay the €442bn they borrowed a year ago. The cash kept their businesses alive, enabling them to keep granting new loans to businesses and households. Instead of offering one year loans today, the ECB is offering to lend money for three months at 1%. This is the same rate as before, but a shorter period of time, and analysts believe the scale of the borrowing, which should be known shortly after 10am, will indicate whether banks are able to come off the life support they have relied on since the banking crisis. Analysts at Barclays Capital said: "How reliant will the sector be on ECB life support now that the effective cost is going up? The surplus liquidity in the euro area leads our rate strategists to estimate that perhaps €150-€200bn of this facility won't get rolled over, meaning that €250bn to €300bn will. A smaller rollover number could be seen as good news for the sector while a larger number may be perceived as bad news." Barclays Capital regards Spain's Santander – owner of Abbey, Alliance & Leicester and parts of Bradford & Bingley – and BBVA as most sensitive among the continental European banks to the refinancing news. "Higher than expected demand for ECB funds could mean that funding problems are spreading beyond peripheral Europe. By contrast, if less ECB money is refinanced, any rally could be focused among the weaker names," the BarCap analysts said.