FRANKFURT, Germany (AP) — The European Central Bank loaned a massive euro489 billion ($639 billion) to hundreds of banks for an exceptionally long period of three years to shore up a financial system that is under pressure from the eurozone’s government debt crisis.
It was the biggest ECB infusion of credit into the banking system in the 13-year history of the shared euro currency.
Wednesday’s loans to 523 banks surpassed the euro442 billion ($578 billion) in one-year loans from June, 2009, when the financial system was reeling from the collapse of U.S. investment bank Lehman Brothers.
The ECB is trying to make sure that banks have enough ready cash so they can keep on lending to businesses. Otherwise, a credit crunch could choke off growth and spread the debt crisis to the wider economy through the banks.
Markets rose modestly on the outsized amount of credit support, which was far higher than the euro300 billion ($392 billion) expected, but the advance soon faded as the loans highlighted the problems facing Europe’s banks. The Stoxx 50 of leading European shares was down 0.4 percent while the euro was trading 0.6 percent lower at $1.3063.
“The good news is, the ECB’s efforts to increase liquidity are working,” said Jennifer Lee, an analyst at BMO Capital Markets. “The bad news is, high demand for the loans creates worries that banks are urgently in need of funds to boost liquidity .”
Helping the banks may be crucial in the year ahead, as many economists think the eurozone may be headed for recession — figures Wednesday showed Italy, the eurozone’s third-largest economy, contracted by 0.2 percent in the third quarter of the year.
Slowing growth would make it even harder for the over-indebted governments that are at the heart of the eurozone’s crisis to get a handle on their debt burdens. A recession in Europe would lower tax receipts and make government debt burdens even harder to handle.
A default on debt payments by a country such as Italy or Spain could cause a new financial crisis and send the global economy into a slump.
While the loans support the banking system they do not address the deeper problem of too much government debt and the lack of a financial backstop big enough to assure markets that governments will be able to pay their debts.
Italy and Spain have been at the center of investor concerns in recent months as their borrowing costs have risen. Those two are considered big to bail out with the current eurozone bailout funds, which have some euro500 billion ($654 billion) in financing. Some of that is already committed to bailouts of smaller Greece, Ireland and Portugal, which have all sought outside financial help after default fears drove their borrowing costs so high they could no longer refinance their debts as they came due. Italy has some euro1.9 trillion in outstanding debt.
The 37-month term of the loans permits the banks to stock up on money for a much longer period and reduces stress on their finances. Many banks have had trouble borrowing from other banks or by issuing bonds as they do in normal times. That is because lenders fear the banks may suffer losses from the crisis and not pay them back.