The 3-year funds will be offered at an interest rate indexed to

http://www.ubs.wallst.com/ubs/mkt_story.asp?docKey=TRE7BF0OX&rptType=TOPNEWS

ECB 3-year tender could ease credit crunch fears

7:05 pm --

* High demand expected at first-ever 3-year liquidity operation

* Demand above 350 billion could ease market pressure

* Tender already has positive impact on money, bond markets

By Sakari Suoninen

FRANKFURT, Dec 21 (Reuters) - The European Central Bank's first ever offer of three-year loans is expected to draw high demand from banks on Wednesday, easing fears of an impending credit crunch and possibly bolstering bond and money markets.

Banks cut their weekly intake of ECB funding on Tuesday, a hint they are saving firepower for the three-year operation, and one of several signs it may be popular.

They also took 142 billion euros in new one-day loans on Tuesday, introduced by the ECB to bridge the gap with an expiring one-week tender for those preparing to take the new ultra-long funds.

Some 140 billion euros in three-month money will also expire on Thursday, when the three-year funds will be delivered, freeing up additional collateral for banks wanting long-term funds.

"Since it was announced we have seen some relief in the market, both in the money market and also in sovereign bond yields, especially in short end," Danske Bank analyst Anders Moller Lumhortz said.

"If we see high take-up, then this could ease pressure further."

The ECB has said the economy could tip into recession if banks do not lend to firms and private consumers, and that it would do everything it can to avoid a credit crunch.

It hopes the limit-free, ultra-cheap and ultra-long funding will have a range of beneficial effects, including bolstering trust in banks, easing the threat of a credit crunch and tempting banks to buy Italian and Spanish debt.

Traders polled by Reuters predicted 250 billion euros being taken on Wednesday, but the range of forecasts, 50-450 billion, shows there is much uncertainty.

Analysts say that take-up above 350 billion euros would be a positive sign for strained countries and a potential catalyst for some thawing of the frozen money market, whereas a low amount would increase money and bond market jitters.

Tuesday's liquidity operations as well as a halving of Spain's short-term financing costs show that the ECB's newest tools to repair money markets are already having an impact and lift expectations for high demand for 3-year money.

The 3-year funds will be offered at an interest rate indexed to the ECB's main refinancing rate over the life of the loan. That rate is, after a rate cut earlier this month, at a record low of 1.0 percent.

For some banks the money could be more than 3 percentage points cheaper than they can get on the open market. As part of the deal they can switch money borrowed from the ECB back in October into three-year funding and will also be able to pay it back after just a year if they so wish.

Another factor boosting demand is that banks are now more reliant than ever on central bank funds. The ECB on Monday said, in its semi-annual Financial Stability Review, that this dependency could be difficult to cure.

French banks have almost quadrupled their intake of ECB money since June to 150 billion euros, while banks in Italy and Spain are each taking more than 100 billion euros.

ECB President Mario Draghi has been pressing banks to take the money since announcing the plans earlier this month. He warned of a chance of a credit crunch on Monday and said that euro zone bond market pressure could rise to unprecedented levels early next year. (Reporting by Sakari Suoninen; editing by Anna Willard)