ECB pumps US$712 bil. of loans into EU banks

By Simon Morgan ,AFP

FRANKFURT — The European Central Bank again played firefighter in the eurozone debt crisis on Wednesday, flooding banks with nearly 530 billion euros in cheap loans to avert a dangerous credit squeeze. The ECB said that 800 banks lined up to borrow a record 529.5 billion euros (US$712 billion) at exceptionally low interest rates in its second three-year long-term refinancing operation, or LTRO. That beats the 489.19 billion euros borrowed by 523 banks in a first such operation in December, but analysts were cautious about the effects and outlook. The ECB launched the ultralong loans late last year with the aim of averting a credit squeeze in the 17 countries which share the euro. The bank hoped the money would be lent to households and businesses and also be used to bring down government borrowing costs. Analysts believe the first operation in December has indeed succeeded in easing funding problems for European banks, which have to deal with 720 billion euros due to mature in 2012.

Furthermore, banks also appear to have used some of the cheap funds to buy sovereign debt of countries such as Italy and Spain.

“This helped to bring down their bond yields substantially and the ECB will undoubtedly be hoping to see a similar impact from the second operation,” said IHS Global Insight economist Howard Archer. But economists suggest the new-found confidence is fragile, and aversion to risk on the interbank market remains high. Austrian central bank chief Nowotny was more hopeful. “There is a more optimistic perspective … some talk about green shoots,” he said.

The ECB itself has recently halted its own program of buying sovereign bonds.

Analysts are skeptical the ECB will want to undertake a third LTRO amid concern within its governing council about the potential longer-term inflationary impact of so much cheap funding being made available.