BUSINESS
10/10/2011 06:46 EDT | Updated 12/10/2011 05:12 EST

Banks park more money with ECB in sign of fears about state of European banking system

FRANKFURT - The European Central Bank bought only €2.3 billion ($3.1 billion) in government bonds last week to keep pressure from the eurozone debt crisis off financially troubled governments.

The figures released Monday show the bank easing back on a controversial program that it wants to hand off to the eurozone's bailout fund as soon as it can.

The purchases were down from €3.8 billion the week before, and well off the €22 billion spent when the program was relaunched in August after being dormant for months.

The bank was cutting back on purchases as it readied different measures that are more in line with its preferred approach to Europe's government debt crisis. It is now aiming to support banks by offering them unlimited amounts of 12-month and 13-month credits that will help secure their finances into 2013.

The ECB has touted liquidity — lending large amounts of ready cash against collateral so that banks can operate day to day — as its key response to the crisis.

The bond purchases, on the other hand, have been controversial and apparently led to the resignation last month of the bank's chief economist, Juergen Stark.

The purchases mean the bank takes on the risk that the bonds will not be paid off, and put the ECB in the uncomfortable position of supporting shaky governments.

Eurozone officials are trying to head off a Europe-wide banking crisis and credit crunch that could hurt global economic growth. If governments that have run too much debt default on their bonds, banks could suffer losses and stop lending. Fears that that will happen are making hard for some banks to borrow.

The governments of Belgium, France and Luxembourg have had to come to the rescue of Dexia, a bank that had trouble borrowing on the interbank credit market because it is heavily exposed to Greek and Italian bonds.

On Monday, Greece's Proton bank was taken over, to be restructured, by the country's bank rescue fund.

Eurozone political leaders are working on plans to put more capital into banks across Europe to better shield them from the government debt crisis. German Chancellor Angela Merkel and French President Nicolas Sarkozy said Sunday night that they expected to come up with a plan by the end of the month but offered no details.

The ECB's bond purchases on the secondary market are aimed at driving down bond market interest rates that are putting pressure on the finances of countries such as Italy and Spain. The bank restarted them on Aug. 7 amid delays in national legislatures agreeing to hand the bond-purchasing power over to a revamped eurozone bailout fund, the European Financial Stability Facility.

The ECB has said it expects the EFSF to take them over as soon as it receives final approval.

Fears that Greece may ultimately default on its overwhelming debt load has raised concerns about other countries' bonds. Greece, Ireland and Portugal have already needed bailouts, and higher interest costs threaten to make affordable borrowing impossible for other countries as well.

Bank figures on Monday showed that banks are parking more money overnight with the ECB, a further sign the eurozone debt crisis is unsettling the banking system.

Banks deposited €255.6 billion ($347.1 billion) overnight Friday, the highest this year, the central bank said on Monday. That surpassed the previous year high of €229 billion from Thursday.

The deposits suggest banks would rather stash money with the ECB than lend it to each other. Banks are afraid that other banks could suffer losses on Greek and other government bonds in case of a default — and not pay them back.