Banks line up for record amount of ECB cash

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Banks borrowed nearly half a trillion euros on the cheap from the European Central Bank on Wednesday but analysts were not convinced even that record amount would be enough to solve the debt crisis.

Some 523 banks borrowed a record 489.2 billion euros ($641 billion) in loans for which the ECB will charge annual interest of just one percent over a period of three years.

Until now, the ECB has lent for a maximum of one year and the new arrangement is part of a series of unprecedented measures on the ECB's part to keep credit flowing in Europe at a time when banks are increasingly wary of lending to each other due to the debt crisis.

Resisting intense political pressure to step in and save eurozone countries sinking under huge mountains of debt, the ECB insists its fire-fighting efforts are limited to acting as lender of last resort for banks only and not for governments.

The ECB has argued from the very beginning of the crisis that it is up to overspending governments to get their finances in order and restore the markets' confidence in their ability to repay their debts, which is the underlying cause of the eurozone's current ills.

Politicians and analysts, on the other hand, have repeatedly called on the ECB to do more -- especially by buying up government bonds which amounts in effect to printing money for countries to repay their debt.

The central bank has been engaged in buying up the sovereign debt of struggling euurozone countries to keep their borrowing costs down but insists that such action is and can only be "temporary" and "limited."

At the same time, the bank has made it clear it is willing to provide unlimited support to the financial sector and last week, ECB chief Mario Draghi announced the central bank was extending the maturity of its loans to ensure favourable rates of funding for banks over a much longer period.

On top of this, the ECB relaxed its rules for the collateral required as guarantees and also halved the ratio of reserves that banks must hold at the ECB, also freeing up capital.

Analysts said the three-year funds would help ease tensions in the banking system, at least in the immediate term, but they were sceptical it would provide the long-lasting boost to confidence that markets had been looking for.

Indeed, some analysts suggested the huge take-up of the new loans revealed the depth of underlying strains in the system and stock markets and the euro, which had been higher in the run-up to the move, fell back subsequently.

Analysts at RBS estimated that about 61 percent, or 289.5 billion euros, of the total amount actually represented a roll-over of banks' shorter-term seven-day, three-month and one-year loans into three-year cash and so was effectively a recycling of existing liquidity in the system.

That meant the overall net addition to liquidity was actually much lower at about 191 billion euros.

"The key question now is whether this net new liquidity will be used to purchase sovereign bonds, lend to the economy or pay maturing bonds," RBS said in a note to investors.

ECB chief Draghi said the aim of the new funding was for banks to lend to households and businesses and thereby avert a credit crunch.

German banks welcomed the move, saying it had "decisively improved the liquidity situation of the European banking sector."

Along with the other liquidity measures announced by the ECB last week, "these are the right and important steps to counter the danger of a credit crunch in the euro area," said the head of the German BdB banking federation, Michael Kemmer.

But there has been speculation that, in face of the ECB's reluctance to step up its purchases of sovereign debt, governments have been pressing the commercial banks to buy the bonds instead.

ING economist Martin Van Vliet calculated that the amount the ECB was making available was nearly one and a half times the bond issuance programmes of Spain and Italy in 2012.

However, given banks' reluctance to invest in sovereign debt for fear the countries may default, analysts doubted the cash would be used to buy what the banks continued to view as risky investments.

"While the action is very important to help stabilise the situation and reduce the funding risk for the banks, it is unlikely to bring about a turning point in this crisis as the problems are much greater than those in the banking sector and has other political and economic dimensions," RBS explained.

Jonathan Loynes, chief European economist at Capital Economics, said he too remained "sceptical of the idea that the operation will ease the sovereign debt crisis."

© 2011 AFP

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