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ECB throws open liquidity floodgates again

29 February 2012, 16:54 CET
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(FRANKFURT) - The European Central Bank threw open its liquidity floodgates again on Wednesday, pumping up the banks with nearly 530 billion euros in cheap loans to avert a dangerous credit squeeze.

In the second such cash bonanza in two months, the ECB said 800 banks took 529.5 billion euros ($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 operation in December but analysts said the move would merely buy time and not be enough on its own to solve the eurozone's crippling debt crisis.

The ECB launched the ultra-long loans late last year with the aim of averting a credit squeeze in the 17 countries which share the euro.

The ECB, lending the money out at just 1.0 percent, hopes the banks will lend the cash to households and businesses and also use it to bring down government borrowing costs.

Analysts believe the first operation in December succeeded in easing funding problems for European banks, which have to deal with debt of 720 billion euros due to mature in 2012.

"We believe that the ECB's intervention has materially reduced the risk of a liquidity-driven bank failure and averted the possibility of a severe credit crunch and additional recessionary pressure across the (euro area)," Standard & Poor's wrote in a report.

"We also think that the ECB's actions have helped warm up public funding markets from the deep freeze of late 2011, although investor demand remains selective."

Nevertheless, S&P said the actions did not address the underlying structural issues in the banking sector, including "capital shortfalls at various banks, the questionable viability of some business models in the medium term, and continued uncertainty over the appropriate carrying values of assets such as certain sovereign exposures," it cautioned.

Capital Economics economist Jennifer McKeown cautioned that "hopes that the funds will also solve the (eurozone) fiscal crisis and breathe life into the ailing eurozone economy are likely to be disappointed."

Italian and Spanish banks, apparently using funds from the December operation, did increase their purchases of sovereign debt in January, no doubt contributing to the fall in government borrowing costs as a result.

But overall eurozone bank purchases of government securities rose by less in January than in November and December, before the first LTRO.

"And even if banks have more money to invest after today's operation, we are not convinced that they will stash it in risky government bonds," Mckeown said.

The head of the German banking federation BdB, Michael Kemmer, also warned that the ECB liquidity was no panacea for the eurozone's ills.

"The measures are buying time but they can't replace a functioning interbank market or solve the sovereign debt crisis," he said.

Berenberg Bank chief economist Holger Schmieding welcomed the move as helping confidence.

"The euro crisis is a crisis of confidence. Whatever makes markets believe that Europe is getting its act together can restore such confidence. With its aggressive 3-year LTRO, the ECB has managed to impress markets," Schmieding said.

"Investors are starting to believe that the ECB will do what it takes to prevent an the implosion of the common currency which many global investors had wrongly predicted late last year. The ECB has shifted perceptions of Europe."

Looking ahead, analysts were sceptical 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.

"There won't automatically be a third round," said Austrian central bank head Ewald Nowotny in an interview in The Times.

European stock markets rose were firmer on the move, led by banking shares while the euro held steady, giving up very modest gains on the news.


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