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Banks grabbed 530 billion euros at the European Central Bank's second offering of cheap three-year funds on Wednesday, fuelling expectations that credit will flow to businesses and borrowing costs will ease for governments hit by the euro zone crisis.
In the space of two months, the ECB has now injected over a trillion euros of money into the financial system, banishing the threat of a credit crunch. The bank hopes Wednesday's move will be its last major crisis-fighting act.
A total of 800 banks borrowed money, with demand exceeding the 500 billion euros seen in a Reuters poll and the 489 billion allotted in the first such operation in December. The uptake was the largest ever at an ECB liquidity operation.
The ECB unveiled the funding operations, known as LTROs, late last year to counter frozen interbank lending and dampen tensions on euro zone bond markets that threatened to tear the bloc apart.
Positive investor reaction to the second round suggested the ploy should continue to buoy markets although central bank sources have told Reuters the ECB is not inclined to offer a third dose.
"You can't argue with 529 billion," said Peter Chatwell at Credit Agricole CIB. "It's undoubtedly positive for risk assets and also will help to support core markets as initially banks need somewhere to store the resultant excess liquidity."
The euro dipped to a session low against the dollar in volatile trade while European stocks gained and safe-haven German Bunds fell in response as risk appetite increased.
Breaking down the headline number, the ECB's move pumped over 300 billion euros of additional cash into the banking system. The additional 230 billion went towards rolling over central bank loans banks had taken previously.
Much will now depend on what banks do with the cash. They used a big chunk of the 489 billion euros they borrowed first time around to cover maturing debt and have been parking close to half a trillion euros at the ECB in overnight deposits.
ECB President Mario Draghi, whose native Italy was at the epicentre of the crisis when the bank announced the measure late last year, said after the first of the operations that "a major, major credit crunch" had been averted.
Draghi has urged banks to lend out funds from Wednesday's LTRO to households and businesses, helping strengthen economic growth. ECB officials hope banks will also buy higher-yielding bonds more aggressively, especially from Italy.
Evidence suggests banks especially in Spain but also in Italy used the first LTRO to ply the "Sarkozy trade" -- a term adopted by markets after the French president suggested that governments urge banks flush with ECB cash to buy their bonds.
Wednesday's take-up suggests that will continue.
The take-up by Italian banks was on "a similar scale" to the 116 billion euros they took at the first offer, a senior Italian banking source told Reuters.
Intesa Sanpaolo, Italy's biggest retail bank, took 24 billion euros of the money handed out, double the amount it tapped in December, and said part of the cash would be used to buy Italian government bonds.
Spain's Banca Civica said it took 6.1 billion euros and that it would use some of the money to buy more debt.
Italian and Spanish borrowing costs extended their falls after the bumper take-up of ECB largesse.
The fact that 800 banks used the latest LTRO -- compared with 492 in December -- suggests that a greater number of smaller banks gained access to funding, helped by the ECB's decision to expand the range of eligible collateral.
Italy faces a debt issuance hump in the next few months and will take any help it can get. It needs to sell around 45 billion euros of its bonds a month in both March and April versus 19 billion in February.
Nonetheless, sources have told Reuters the central bank wants the second LTRO to be the last, as it is worried banks are becoming too reliant on ECB funds and wants to throw the onus back on euro zone governments to tackle the debt crisis.
Banks have already taken more funds from the ECB than ever before and risk becoming dependent.
Some policymakers say the LTROs are merely masking problems in crisis-hit euro zone countries on the bloc's periphery.
"The idea that the long term repo operations have eased the supply of finance to small businesses in the euro area is a myth," Bank of England Governor Mervyn King told a parliamentary committee in London.
"What it has done is to provide a source of funding to banks particularly in the southern member countries of the euro area which were experiencing a bank run, enabling them to fund the withdrawal of funds," he said.
Bundesbank chief Jens Weidmann has expressed concern that "too generous" supply of liquidity could lead to inflation risks but another ECB policymaker, Athanasios Orphanides of Cyprus, played down the prospect of the three-year money fuelling price pressures.
What is undeniable is that Draghi's gambit has sucked much of the heat out of the euro zone crisis and given governments time to work out sustainable budget and growth policies for affected countries on the periphery of the bloc.
Ratings agency Standard & Poor's said the ECB funding measures had reduced the risk of liquidity driven bank failure and averted a severe credit crunch in the euro zone.
"Nevertheless, we consider that the ECB's actions do not address the underlying structural issues in the banking sector," S&P said in a statement, citing capital shortfalls at some banks and some questionable business models.
Rather than a simple flat rate, the 3-year funds were offered at an interest rate averaging the interest rate in the ECB's main one-week refi operations over the next three years. That rate is currently at a record low of 1.0 percent.
Banks have the option of paying back all or parts of the loans at any time after one year.
Financial markets are watching to see how effectively governments use the time the ECB has given them to deliver growth and sustainable budgets.
"Without growth, the LTROs are a bridge to nowhere," said Andrew Bosomworth, senior portfolio manager at PIMCO.