Strong appetite for ECB loans fails to boost markets

Markets have struggled to gain further ground after the European Central Bank announced it had lent almost €500bn to banks in a three-year liquidity operation.

The ECB's three-year long term refinancing operation saw 523 banks borrow €489bn from the central bank, a figure well above consensus expectations of between €250bn and €330bn.

The FTSE 100 moved as high as 5,479 following the announcement, a rise of 1.1%, before falling back to 5,454. In Europe, the Cac 40 rose 1.5% to 3,102 and the Dax rose by 1.5% to 5,935 before paring gains.

Financials were the biggest gainers, though the largest rises came in anticipation of the ECB announcement. Lloyds Banking Group rose as much as 5.6% to 24.95p, with RBS up 4.4% at 20.5p. In Germany, Deutsche Bank was up 4% and Commerzbank rose 3.4%. Italy's Intesa Sanpaolo rose 5.2%.

The euro strengthened against the dollar on the news, moving up to $1.316, before falling back below $1.307 as risk appetite waned.

The reaction in the government bond market was more muted. Italian 10-year bonds were yielding 6.7% shortly after the announcement, with Spanish 10-years yielding 5.1%.

Analysts had previously speculated financials would use the LTRO not just for financing requirements but also to fund a carry trade in which they would borrow cheaply from the ECB then buy higher-yielding sovereign debt, though not all are convinced.

"Even if we are wrong and much of the funds do flow into peripheral government bonds, the amounts involved are not a substitute for the much bigger purchases, or guarantees, which markets have been hoping for from the ECB itself," said Jonathan Loynes, chief European economist at Capital Economics.

UK 10-year gilt yields moved fractionally lower to 2.085% after the Office for National Statistics said borrowing for November came in at £18.1bn, down from £20.36bn in November 2010 and below a consensus forecast of £19.6bn.