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Spanish banks borrow record amounts from European Central Bank in June

Short-term loans jumped by almost five times in June

The lack of confidence in Spain as evidenced by investors pulling out of the country in hordes sent Spanish banks scurrying to the European Central Bank (ECB) for record amounts of funding last month.

According to figures released Friday by the Bank of Spain, the domestic financial system sought 337.206 billion euros from the ECB in June, the biggest amount since the single-currency bloc came into being in 1999.

Borrowings of Spanish lenders from the ECB have now increased by seven times compared with June of last year, when they asked for only 47.777 billion euros. Compared with May, the amount lent by the ECB to domestic banks grew 17 percent.

The latest figures were released just days after the Eurogroup agreed to provide a bailout to the Spanish banking sector worth up to 100 billion euros to help lenders recapitalize.

The balance sheets of a number of Spanish banks have been badly damaged by their exposure to the real estate sector, which has remained in a deep slump since around the start of 2008 and shows no signs of reviving.

“It was to be expected that the amounts borrowed would have risen as a reflection of the growing mistrust toward the Spanish banking sector,” Reuters quoted Espírito Santo bank analyst Juan Pablo López as saying.

“The banks here have seen their access to the wholesale funding markets cut off, retail investors and savers felt a growing lack of confidence in their banks and it smacks somewhat of a run on deposits, while the yields offered by the Treasury in its issues constitute direct competition for capturing funds,” López said. “Under this scenario, the Spanish banks have no choice but to go to the ECB in search of funding.”

Bank of Spain figures showed that bank deposits by residents declined 2.5 percent in April from March and were down 5.4 percent from a year earlier. “The fear is that this \[the increased ECB borrowings\] was triggered by a further deposit outflow,” Bloomberg quoted Tobias Blattner, an economist at Daiwa Capital markets in London, as saying. “It’s a very large sum.”

At the same time, non-residents pulled out 24.6 billion in stock and bond investments, compared with 4.54 billion a year earlier.

Distrust on the part of the investment community in the administration’s ability to service its debt at a time when the economy has slipped back into recession has pushed government bond yields sharply higher, making it prohibitively expensive for local lenders to tap the wholesale market. The yield on the benchmark 10-year government bond stood at 6.663 percent in late trading Friday, with the spread with the German equivalent up slightly at 540 basis points.

The amount borrowed by Spanish banks last month from the ECB accounted for 77 percent of the net 437.789 billion euros lent to the Eurosystem as a whole. Long-term borrowings by Spain’s lenders amounted to 320.036 billion euros, up 5 billion from the previous month, while short-term borrowings jumped from 9.2 billion to 45 billion.

At the same time, deposits by Spanish banks with the ECB declined from 36.829 billion euros.