PIGS keep gobbling Euros

Two little PIGS went (back) to market (partly) last month, but the other two stayed firmly at home.

According to central bank data, the four countries whose banks have been most dependent on the ECB for liquidity–Portugal, Ireland, Greece and Spain–still accounted for over 60% of all the ECB funding still in the market in September.

Spanish and Portugese banks cut their dependence by 14% and 20%, respectively. Meanwhile, Greek banks stayed on the drip feed, and Ireland’s, beset by balance sheet problems and ratings downgrades, positively grasped for the bottle. Irish banks now borrow more from the ECB than French, Italian and Austrian banks combined.

That’s bad news for central bankers who are sounding increasingly impatient to have the region’s banks back on a sound footing, so that they can start to raise interest rates if they need to. The ECB has to run a monetary policy for 16 countries, most of which are emerging from recession and starting to look reasonably healthy again.

At the very least, some at the ECB would like to return to their old practice of rationing liquidity and letting banks bid competitively for it, but the data suggests there are still too many banks who would collapse under that kind of pressure.

The ECB had opened the liquidity taps as wide as they would go to keep Europe’s banking sector afloat and off the rocks in 2009. In theory, that could have risked inflation. As it turned out, it has managed to take back all but €40 billion of the excess without causing a panic, and without causing inflation. Inflation may have hit its highest level in nearly two years in September, but at 1.8%, it is still below the ECB’s 2% pain threshold–and it’s expected to fall again next year.