December 21, 2011

ECB Lends to Banks to Keep Credit Flowing

Record amount is more than forecast, most ever in single operation

The ECB has extended a record loan package to European banks. (Photo: AP) The ECB has extended a record loan package to European banks. (Photo: AP)

The European Central Bank says it will lend European banks 489 billion euros ($645 billion) in 1,134-day loans, a move that sets a record: the most in a single operation. It is also more than expected by economists, who had forecast a median estimate of 293 billion euros in a Bloomberg survey.

The three-year loans begin Thursday, according to a Bloomberg report, and are an attempt to keep credit flowing throughout the eurozone at a time when austerity and cost-cutting measures are spreading everywhere. The money will be lent at an average of the ECB’s benchmark rate of 1%.

The ECB has also expanded the kinds of collateral banks can use to obtain loans, as it seeks to keep them lending to households and businesses at a time when they are reluctant to risk parting with funds and when the cost of credit is on the rise.

Michael Schubert, an economist at Commerzbank in Frankfurt, commented in the report, “What the ECB wants is that the funds be used by banks to keep handing out loans. But there’s a second argument, which is to do carry trades by borrowing on the cheap at the ECB and buying sovereign bonds. We don’t know what the banks are using the money for.”

Laurent Fransolet, head of fixed income strategy at Barclays Capital in London, was quoted saying of the move, “It was obviously an offer the banks could not refuse. It shows the ECB is not out of ammunition and it gives banks security on liquidity for a few years. On the other hand it means banks will rely on the ECB for longer.”

Barclays has estimated that these loans will add 193 billion euros in new money into the system; 296 billion euros will be accounted for by loans coming to maturity. According to the ECB, 523 banks asked for the money.

Jacques Cailloux, chief European economist at Royal Bank of Scotland Group in London, was quoted saying, “It’s very significant and very helpful for the banks. But it’s not going to bring about a turning point in this crisis.”

The central bank made other loans in addition to the three-year vehicles: $33 billion went out for 14 days in a regular dollar offering, which was an increase from last week’s $5.1 billion, and it also provided 29.7 billion euros for 98 days.

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