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Spain banks' ECB borrowing hits 17-month low in Oct

Source: Reuters - Fri 12th Nov 2010

Borrowing by Spanish banks from the European Central Bank dropped in October to its lowest level in over a year, suggesting the peripheral euro zone nation's banking system is in relatively good health.

Spanish banks borrowed 71 billion euros from the ECB in October, Bank of Spain data showed on Friday, the lowest since May 2009 and down more than a third from the 112 billion euros borrowed in September.

"Data gives further confirmation that the Spanish banking system is not as addicted to ECB liquidity as could have been feared a few months ago" said Tullia Bucco, economist at Unicredit.

Irish, Portuguese, Spanish and Greek banks have faced difficulties financing themselves on international capital markets in recent months because of investors' worries about high debt levels and weak growth prospects in these countries.

Those concerns have resurfaced in recent days as Ireland's struggles to avert a Greek-style bailout have intensified.

Spanish bank borrowing from the ECB peaked at 140 billion euros in July, reflecting tough borrowing conditions before largely positive results in bank stress tests on July 23.

This situation has eased since August and Spanish banks have been able to access wholesale markets, although at a price.

By comparison, Portuguese bank borrowing at the ECB window also eased in October though at a far slower rate, dipping 0.6 percent to 40.04 billion euros, the Bank of Portugal said on Monday.

The premium investors demand to hold 10-year Spanish bonds against the German Bund narrowed 4 basis points to 219 bps from Thursday's close, less than half the premiums being charged on equivalent Portuguese and Irish debt.

The ECB has indicated it wants to rein in the exceptional funding measures for banks, under which it provides funds to lenders taking government bonds and asset-backed securities as collateral.

But Bucco of Unicredit said she did not expect the ECB to tighten conditions any time soon, given the deepening credit crisis in Ireland which has centred on rising losses in its banking system.

"The tension and vulnerability of the banking system is just too high at the moment, (any tightening) could trigger a brutal market reaction" she said.

Overall, outstanding bank loans on the ECB's balance sheet had risen to 534.09 billion euros on Oct 29 from 514.12 billion on Oct. 1, data from the central bank showed.

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