May 18, 2012 / 1:10 PM / 7 years ago

MONEY MARKETS-Cash pullout means more ECB reliance

* Accelerating withdrawals point to more ECB reliance

* Another three-year LTRO seen as only short-term fix

* Demand for three-month cash could rise

By Kirsten Donovan

LONDON, May 18 (Reuters) - A scramble by savers to withdraw cash from banks as they fret about a Greek euro zone exit and the health of Spanish financial institutions may leave lenders even more reliant on the European Central Bank’s cheap financing operations.

The amount of cash they take could rise at the ECB’s one-week, one-month and three-month operations in the next few weeks and some analysts think the euro zone’s central bank may have to plug the funding gap with more cheap longer-term loans.

But with 800 billion euros of excess liquidity already sloshing around in the banking system, money market rates are unlikely to fall much further unless banks believe the ECB will cut the 0.25 percent rate it pays on overnight deposits.

“Banks will have to replace lost deposits and so long as they’ve got the collateral they can go to the ECB,” said RBS rate strategist Simon Peck.

“We will probably see an increasing reliance on ECB funding from banks in Spain and Italy. Those without sufficient ECB eligible collateral can turn to their national central bank via the Emergency Liquidity Assistance.”

The ECB holds weekly financing operations and the next three-month tender will be held on May 30.

“The Greek elections are still four weeks away, so if the deposit flight continues to gain pace then banks will want to shore up their funding profile as much as possible, which would point to use of the three-month funding operations,” Peck added.

According to minutes of Greek President Karolos Papoulias’ comments to political leaders posted on the presidency’s website, Greek savers withdrew at least 700 million euros from the country’s banks on Monday alone..

Spain’s Bankia, meanwhile, has seen its share price slump as much as 30 percent after a report - denied by the government - that customers had drained more than 1 billion euros from the partly nartionalised lender in the past week.

There was no let up in the bad news on Spanish banks, with Moody’s downgrading 16 of the country’s lenders late on Thursday and bad loans rising to their highest level in outstanding credit portfolios since 1994.

Investors panicked by the prospect that a political crisis in Greece could trigger a euro zone financial meltdown have pushed prices for German debt to record highs in recent days, disregarding near-zero returns as they rush for safety.

Greek bank deposits have fallen almost 30 percent since the start of 2010, according to ECB data, and Societe Generale said a similar outflow in Spain or Italy could create funding gaps of 140-280 billion euros and 200-400 billion euros respectively.

“As deposit outflows outpace de-leveraging, we need another one trillion euro LTRO,” the bank’s strategists said, referring to the ECB’s longer-term refinancing operations in December and February, which pumped almost 1 trillion euros of three-year cash into the banking system.

Whether banks have the collateral to plug such a funding gap is another matter. A number of Greek banks are no longer able to fund themselves at the ECB, relying instead on Emergency Liquidity Assistance (ELA) from the Bank of Greece, for which lower quality collateral can be used.

Latest ECB data, which covers the period to the end of March - before the current intensification of the crisis - showed Spanish bank deposits have been relatively stable over the last two years, while those at Italian banks have actually risen.

Top-rated, core euro zone countries such as Germany and France saw bank deposits increase by between 5 and 10 percent in the same period.

Overnight Eonia rates are pinned roughly between 0.33 and 0.35 percent, constrained from falling in much further by the ECB’s 0.25 percent deposit rate, which acts as a floor.

According to BNP Paribas, markets are already pricing an “aggressive” 66 percent chance of a 12.5 basis point cut in the ECB’s deposit facility rate by year-end.

A higher expectation of such a cut would be a stronger factor in pushing Eonia rates lower than a further increase in excess cash in the banking system but many analysts believe that the ECB will not take such a step.

“We don’t believe that a depo rate cut could have any meaningful effect on the interbank system and the real economy at the current juncture,” said strategist Matteo Regesta in a note.

“Another three-year LTRO would buy more time, but, as we have learnt by now, its effects would not be long lasting.”

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