FRANKFURT, April 15: Chronic tension on eurozone money markets was demonstrated on Tuesday by two European Central Bank operations that showed banks were much more interested in obtaining cash than in turning it back in.

The ECB alloted 205.4 billion euros ($325 billion) in a regular weekly refinancing operation, or 35 billion euros more than it had anticipated. A relatively large total of 310 banks bid for the funds, which were alloted at an average rate of 4.26 per cent, well above the benchmark ECB refinancing rate of 4.0 per cent.

One week earlier, a similar offer to commercial banks had placed 130 billion euros at their disposal at an average rate of 4.24 per cent.

Meanwhile, the bank also reported a weak response to its one-day operation aimed at withdrawing surplus cash from the markets.

Only seven banks responded to an ECB offer to mop up excess liquidity at its benchmark rate, with the central bank taking in a total of 14.88 billion euros instead of the 21 billion it had forecast.

That operation was carried on the last day of a refinancing period, when the ECB typically “fine-tunes” the amount of cash provided to help commercial banks meet minimum reserve requirements.

The two responses suggested that eurozone banks still preferred to maintain larger cash reserves amid heightened tension on markets they use to lend money to one another.

Since the US market for high-risk, or subprime, mortgages collapsed in August, banks have become wary of lending to each other because it is not completely clear how exposed each might be to potentially massive losses.

Tight conditions on such markets are clear indicators that financial strains persist, and while the ECB has refrained from lowering its main lending rate, it has not held back from regularly pumping funds into the banking system.

Excess funds are eventually withdrawn to make sure a swollen supply of cash does not add to eurozone inflation, which hit a record of 3.5pc in March.—AFP