ECB boosts loans to 1 trillion Euro to stop credit crunch

Wednesday, February 29, 2012
The European Central Bank (ECB) will issue a second round of cheap

three-year loans on Wednesday (29 February) in order to help cash-strapped

eurozone banks.


In total, the bank is lending almost €1 trillion after it already injected

some €500 billion into the system in December because euro-area banks became

wary of lending to each other.


The programme has so far been used mainly by Spanish and Italian banks to

shore up funding gaps and buy government bonds. But it has done little to

boost confidence in the sector, as evidenced by the record sums being

'parked' overnight in the ECB instead of circulating among lenders.


On Tuesday, for instance, €475 billion was given to the ECB for

safe-keeping - almost the same sum that was to be made available in cheap

loans.


Nordic banks such as Sweden's Nordea and Swebank said they would not take up

the loans as they come with a 'stigma' of a bank in need of help. Even

though Sweden is not a euro-country, its banks are eligible for the loans

because they have branches in eurozone states, such as Estonia and Finland.


Meanwhile, Greek banks will not be able to tap the funding after Standard &

Poor's downgraded the country to 'selective default,' which technically

prohibits the ECB to take on Greek bonds as collateral for loans. Emergency

funding is available to Greek banks via the country's central bank,

however - pending a decision by eurozone finance ministers on Thursday to

let the temporary eurozone bail-out fund, the European Financial Stability

Facility, to guarantee loans up to €35 billion.


For its part, the Fitch ratings agency has warned the ECB's unorthodox cash

injection will only 'delay the collapse of weak banks.'


An economist from the ING Bank told this website that the programme amounts

to a 'sophisticated way of printing money' even though the massive loans are

not 'real money' issued in by euro printing presses, but 'electronic money'

which stays inside the system unless banks give it out as cash to individual

customers.


'This will not automatically lead to inflation, only if commercial banks

pour all money they get into the real economy,' Carsten Brzeski explained.


'The credit crunch has not been avoided yet. The risk is still out there and

the crisis is not over. There is still lack of liquidity in some banks and

lack of demand for government bonds.'


If some of the banks taking ECB loans go bust down the line or their

collateral proves worthless, the ECB's own balance sheet would suffer.


Diego Valiante from the Centre for European Policy Studies, a Brussels-based

think tank, said the real problem is that EU institutions have prohibited

the ECB from helping governments directly, forcing it to expose itself to

the more risky bank loan option.


'This additional cheap liquidity in the system is very risky for the ECB and

the entire system. It creates a moral hazard for banks not to restructure

and delays the problem even more,' he told EUobserver.