ECB funding demands surge

FRANKFURT/LONDON (Reuters) – Euro zone banks’ demand for central funding surged to a two-year high on Tuesday, and U.S. funds cut their lending to the bloc’s banks, tightening a squeeze that looks unlikely to ease this year.

Fast-spreading sovereign debt worries have left lending markets virtually frozen and the European Central Bank as the only available funding option for many banks.

The ECB’s weekly, limit-free handout of funding underscored the widespread problems, with 178 banks requesting 247 billion euros, the highest amount since mid-2009.

Just as fears about the financial health of Italy and Spain have stopped banks lending to some their peers, U.S. funds have also continued to retreat from the region, and Italian and Spanish banks have seen corporate deposits flow out to safer havens.

U.S. money market funds, which are key providers of liquidity to banks and have been pulling back from the euro zone since May, cut their exposure to European banks by a further 9 percent in October, according to ratings agency Fitch.