ECB sees signs of thaw in credit freeze

NEW YORK (CNNMoney) -- The European Central Bank's latest effort to prevent a credit crunch in the European banking system appears to be showing signs of success, and some analysts say it could also be providing some relief for tensions in the government bond market.
ECB President Mario Draghi said Thursday that the first round of the central bank's Long Term Refinancing Operation, which pumped some €500 billion worth of 3-year loans into the banking system last month, has eased conditions for banks struggling to secure funding in the private market.
"We do think that at least this decision has prevented a credit contraction that would have been more serious, much, much more serious," Draghi said at a press conference in Frankfurt following the ECB's latest policy meeting.
In particular, Draghi said some markets for unsecured bank bonds have reopened since the lending program launched. That's encouraging, he added, because banks have more than €200 billion worth of bonds coming due this year.
Draghi also said there are indications that some of the loans are making their way into the real economy, despite a recent surge in overnight deposits at the ECB.
"We really see evident signs that this money doesn't simply stay in the deposit facility," said Draghi. "This money circulates in the economy."
Indeed, banks' overnight deposits at the ECB fell slightly Thursday to €470.6 billion from a record €485.8 billion Wednesday. But the amount of money parked at the ECB remains high, suggesting banks are still hunkering down.
The dip in overnight deposits at the ECB coincided with strong demand for Spanish and Italian debt at two auctions Thursday, raising speculation that some banks were using ECB funds to buy bonds issued by stressed euro area governments.
Draghi acknowledged that demand for shorter-term government bonds has been trending higher recently, but he downplayed any possible connection with the ECB's latest liquidity measures.

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