[QODLink]
Europe
European economy gets huge cash injection
Private banks buy more than $700bn in funds from European Central Bank, helping to keep Italy and Spain from debt trap.
Last Modified: 29 Feb 2012 20:03
Mario Draghi, the ECB president, said the last such offering averted a 'major, major credit crunch' [GALLO/GETTY]

Banks have bought $713bn in funds from the European Central Bank at the lender's second offering of cheap three-year funds, raising hopes that more credit will flow into European lending markets and government borrowing costs will begin to ease further.

A total of 800 banks borrowed at the ECB's latest offering on Wednesday, with demand exceeding the $672bn expected by traders and well above the $657bn allotted in the first such operation, which took place in late December last year.

"This will increase the level of excess liquidity pretty sharply which is ultimately positive or very positive for risk trades," Luca Cazzulani at UniCredit said. "Italian and Spanish bonds are likely to benefit from this and equity markets as well."

The euro rose briefly before easing versus the dollar while stocks were little changed immediately after the slightly better-than-expected take-up.

The three-year-loans are the ECB's latest attempt to fight the eurozone crisis.

Mario Draghi, the president of the bank, termed the first such offering of what are known as long term refinancing operations (LTRO) a measure that had averted "a major, major credit crunch".

Much of the $657bn that 523 banks had borrowed the first time was used to cover maturing debt. Draghi has urged them to lend out the funds they have tapped at Wednesday's tender to households and businesses, helping them to strengthen economic growth.

ECB officials are also hoping that banks will use the money to buy higher-yielding bonds, and invest in higher risk sovereign debt, more aggressively.

Spanish banks bought a net $31bn of government debt last month and Italians $27.6bn, both record increases.

Dependency risk

Banks have already taken more funds from the ECB than they had done before, and now risk becoming dependent on such offerings.

Follow our comprehensive Euro Crisis spotlight coverage

Italian banks, for example, had taken more than $268bn in central bank funds by January, and those in Spain and France were not far behind.

Analysts say the LTROs are allowing governments time to work out sustainable budgets and growth targets.

"With the ECB's supporting measures time is being won," Michael Kemmer, managing director of Germany's BdB banking association, said.

"But these measures can neither replace a functioning inter-banking market nor solve the debt crisis."

Rather than a simple flat rate, the three-year funds were offered at an interest rate averaging the interest rate in its main one-week refinancing operations over the next three years.

That rate is currently at a record low of one per cent. Banks have the option of paying back all or parts of the loans at any time after one year.

It is illegal for the ECB to offer direct support to a government, but these credit infusions to banks allow it to do so indirectly, using the banks as conduits. It does not, however, have any formal say over how the banks invest the money.

Source:
Agencies
Topics in this article
People
Country
Organisation
Featured on Al Jazeera
Italy struggles to deal with growing flood of migrants willing to risk their lives to reach the nearest European shores.
Israel's Operation Protective Edge is the third major offensive on the Gaza Strip in six years.
Muslims and Arabs in the US say they face discrimination in many areas of life, 13 years after the 9/11 attacks.
At one UN site alone, approximately four children below the age of five are dying each day.
Featured
US state is first to issue comprehensive draft regulations for the online currency, but critics say they are onerous.
Survivors of Shujayea bombardment recount horror tales amid frantic search for lost family members.
Abdiweli Sheikh Ahmed tells international donors to be more accountable and work more closely with the government.
Indian rights activists are concerned about proposed changes in juvenile law that will allow harsher punishment.
Acidification of the world's oceans is believed to be behind plummet in oyster population in the US' Pacific Northwest.
join our mailing list