21 Dec 2011

Biggest ECB cash injection eases eurozone jitters

Fears of another credit crunch are eased slightly as banks take up almost 490bn euros in loans from the European Central Bank.

The ECB has said the economy could tip into recession if banks do not lend to businesses and private consumers, and this tranche of loans is its latest attempt to ease problems in the eurozone.

The demand from European lenders should provide hope that a credit crunch can be avoided and the money could be used to buy Italian and Spanish debt.

It’s more than a sticking plaster, although it’s by no means the solution longer term. Analyst Chris Wheeler

The nearly half-trillion euros take-up of ECB funds exceeded almost all forecasts. A total of 523 banks borrowed money, making it the most the ECB has ever pumped into the financial system.

Following a string of failed attempts by eurozone leaders to thwart market attacks on the eurozone’s weaker members, hopes of crisis relief before the year end had been pinned on a massive uptake of the ECB’s ultra-long and ultra-cheap loans.

Crunch threat eased

Analyst Annalisa Piazza of NewEdge Strategy said: “The take-up was massive… much higher than the expected 300bn euros. Liquidity on the banking system has now increased considerably”.

The funding should bolster banks’ finances, ease the threat of a credit crunch and may tempt them to buy Italian and Spanish bonds, thereby easing the currency area’s sovereign debt crisis.

Analysts said there was little prospect of the cash being hurled at the debt of eurozone weaklings, and while an interbank lending freeze may have been averted, the lack of trust between banks to lend to each other remains unresolved.

Temporary optimism

But optimism that the grab for funding would ease Europe’s two-year old debt crisis quickly faded, sending the euro and stocks lower after an initial jump.

Banks have struggled to attract funding mainly because of worries about the underlying health of eurozone countries and their exposure to it, so becoming more reliant on the ECB and pledging more assets against those loans may add to the problem.

Chris Wheeler, bank analyst at Mediobanca in London said: “It’s helpful. It’s more than a sticking plaster, although it’s by no means the solution longer term”.