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Bank deposits at ECB reach year high

Banks from the 17 European Union countries that use the euro stashed 347 billion euros overnight with the European Central Bank

Written by Associated Press | Frankfurt | Published: December 25, 2011 12:28:04 am

Banks from the 17 European Union countries that use the euro stashed 347 billion euros overnight with the European Central Bank (ECB),in another sign that the Continent’s debt crisis is still putting pressure on the banking system despite central bank support.

The figure announced Friday,equivalent to $453 billion,is the highest for 2011,topping 346.4 billion euros earlier this month.

It is a sign of mistrust in the interbank lending market where banks raise operating funds,suggesting they are depositing money with the central bank at low interest rates because they are afraid to lend it to other banks — for fear they won’t get paid back.

Europe is suffering from a debt crisis marked by concerns that heavily indebted governments,like Italy,may be unable to pay off their bonds. That means trouble for banks because they typically hold government bonds.

The large deposits come despite Wednesday’s big central bank credit operation,in which the ECB let banks borrow as much as they wanted for up to three years. As a result 523 banks took 489 billion euros,the largest package of loans from the central bank in the 13-year history of the euro.

The ECB has stepped up lending to banks to help them get through the crisis. Some of the banks are finding it extremely difficult to raise money elsewhere,so the bank steps in as lender of last resort,a typical role for central banks in times of turmoil. The bank has refused to play the same role for governments by buying large amounts of their bonds,saying they must get their debts under control through their own efforts and not wait for a central bank rescue.

European governments are trying to win back the confidence of bond market investors by reducing deficits,a difficult job in a slowing economy. The Italian prime minister,Mario Monti,won approval Thursday from the Italian Senate for 30 billion euros in additional cutbacks and revenue increases.

Greece is working on a deal to cut its debt by making bondholders accept a bond exchange that would mean a 50 per cent reduction in the value of their investments, instead of the larger losses that would come from a disorderly default.

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