The E.C.B., making an offer too good for Europe’s banks to refuse, reported Wednesday that it had doled out almost half a trillion euros in low-cost three-year loans to keep credit flowing at a time when European banks are finding it all but impossible to finance their operations through normal market channels.
The lending reduces the “risk of a Lehman-type situation, where banks go into the new year facing a wave of refinancing and are unable to access the market,” said Jacques Cailloux, the chief euro zone economist at Royal Bank of Scotland.
But it is probably only a temporary solution. By acting essentially as a lender of last resort to the European financial system, the E.C.B. managed mainly to buy time for Europe to work out its longer-range problems of excessive debts, lagging economic competitiveness and limited fiscal unity.
The E.C.B. allocated €489.2 billion, or $639 billion, to 523 institutions, well above the roughly €300 billion estimate of analysts polled by Reuters and Bloomberg News.
Even as Mario Draghi, the new E.C.B. president, continues to resist calls to stand directly behind sovereign debtors without limit, the scale of the liquidity injection suggested that the E.C.B. is prepared to indirectly support them through the banking system.
Carl B. Weinberg, chief economist at High Frequency Economics and a self-described bear on the European outlook, said he was stunned by the size of the monetary operation, saying it suggested Mr. Draghi had “shown a path toward averting catastrophic collapse in Europe.”
Coupled with an easing of reserve requirements announced this month, Mr. Weinberg said, the results suggested that the E.C.B. had injected around €400 billion into the financial system so far in December.
“This is exactly what happened in the United States with the Fed in 2008,” Mr. Weinberg said. “They bought toxic assets and withdrew them from the market, and gave the money they printed to the banks, who put that money into the government bonds that were sold to fund TARP.” (TARP is the acronym for one of the U.S. bailout funds used to protect the U.S. banking system from failure.)
Mr. Draghi has been reluctant to involve the E.C.B. directly in the market for sovereign debt, saying the bank is forbidden by treaty from financing governments or engaging in the sort of “quantitative easing,” or pumping money into the economy, carried out by the U.S. Federal Reserve and others.
But Carsten Brzeski, an economist in Brussels with ING Group, said the infusion of funds Wednesday nonetheless “amounted to a bit of a backdoor Q.E.,” because the funds made available to the banks could then be lent to European governments at higher rates with little risk. That should ease the strains within both the banking system and the market for European government bonds.
In exchange for collateral, lenders borrowed at the E.C.B.’s benchmark interest rate, currently 1 percent. Mr. Brzeski noted they could then use the funds to purchase the debt of euro zone governments, pocketing the difference as profit. Spanish bonds of two-year duration, for example, yield around 3.4 percent; in Italy rates are even higher.
Mr. Draghi acknowledged during a speech to the European Parliament on Monday that banks might be doing just that. “We don’t know how many government bonds they are going to buy,” he said.
Strong demand at recent Spanish debt auctions has driven down yields, suggesting that banks are loading up on the debt to use as collateral for the E.C.B. loans, analysts said. But there are limits to their appetites for sovereign debt at a time when they are trying to reduce their vulnerability to a potential debt default by a country like Greece or Italy, and protect themselves against the possibility of a breakup of the euro zone.
The injection of three-year funds was one of the new measures announced by the E.C.B. on Dec. 8 to calm European credit markets. It was the first time that the E.C.B. had extended such loans for longer than about a year.
Article source: http://www.nytimes.com/2011/12/22/business/global/demand-for-ecb-loans-surpasses-expectations.html?partner=rss&emc=rss
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