The reliance of eurozone banks on the European Central Bank was demonstrated on Monday when Portugal revealed that its domestic banks were tapping the central bank for record amounts of funding.
The Bank of Portugal said the use by domestic banks for the various facilities available from the ECB rose to €56.3bn in March – up from €47.5bn in February and greater than the previous record level of €49.1bn in August 2010.
Bailed out by the EU and International Monetary Fund in April 2011 for €78bn, Portugal has €12bn earmarked for bolstering its banks' capital positions if necessary in the months ahead.
The plight of Portugal's banks was revealed following the cash injection by the ECB in February when the central bank lent €529bn to 800 banks across the eurozone through its long-term refinancing operation (LTRO).
Portuguese banks were among those frozen out from the wholesale funding markets – where banks borrow from each other or professional investors – during the height of the eurozone crisis and as a result are among a number in the eurozone that utilise ECB funding.
"I think it's natural and reasonable for banks to have taken advantage of these funds under the circumstances, especially after the ECB relaxed some collateral requirements before February's injection," Teresa Gil Pinheiro, chief economist at Banco BPI in Lisbon, told Reuters.
"The LTRO injection was in late February so it's natural that it is registered in March," she said.
The Portuguese continued reliance on ECB funding comes amid fresh concerns in the eurozone about the price at which the governments of Spain and Italy can borrow on the markets.
A weak auction of Spanish government bonds last week – when some €2.5bn rather than €3.5bn were sold – was regarded a sign that the initial confidence the ECB created through its injections of cheap cash was evaporating.
"Of immediate concern is the trend in Spanish and Italian government bond yields," said Gary Jenkins of Swordfish Research. "The recent uplift in yields for both Spain and Italy are most concerning, because whilst in the short term the LTROs helped to save the system, they could accelerate the crisis if they do not work in lowering yields and encouraging investors to buy Italian and Spanish government bonds," Jenkins added.
He is concerned that if yields keep rising, and the prices fall, the banks which have bought the government bonds will find themselves in a difficult position when they next disclose their holdings of government bonds.
There is also criticism that the cheap funds being provided by the ECB are being sat on by banks and not being used to finance loans to companies or individuals.
"As banks across the euro area hoard cash, the long-term refinancing operations appear to be having a limited impact on the real economy, and we may see the ECB continue to carry out its easing cycle in 2012 as the region remains at risk for a prolonged recession," said David Song, currency analyst at DailyFX.
Last week, data showed more than 17 million people in the eurozone were out of work in February, the highest level since 1997 – two years before the single currency was created in January 1999.
New data on Monday showed that industrial production in Greece – the first eurozone country to receive a bailout – continued to fall in an economy already on track for its fifth consecutive year of recession. In February industrial production fell 8.3% on the year, after falling 6% in January and almost 12% in December.
