Seeking to spur bank lending and pull continental economies out of recession, the European Central Bank has poured 442 billion euros ($613 billion) into money markets via the offer of one-year funds, its biggest ever fund injection.
AFP - The European Central Bank lent commercial banks a record 442.24 billion euros (620 billion dollars) at 1.0 percent on Wednesday via its first offer of 12-month funds in a bid to boost credit flows.
Some analysts expected the ECB's spectacular move to trim rates charged by commercial banks for long-term borrowing, but others were less sure.
If that does happen, easier credit could underpin a rebound as the eurozone slogs through what is tipped to be a sluggish recovery from the worst global recession in more than 60 years.
German Finance Minister Peer Steinbrueck hailed the move, saying: "The ECB has done what is right and necessary to avoid a credit squeeze."
The central bank has resisted so-called "quantitative easing" (QE) enacted by the US Federal Reserve and Bank of England (BoE) -- essentially printing money to buy state and private debt to boost struggling economies.
Instead, the ECB has unleashed a flood of cash through loans that will now extend to 371 days, or 12 months, from one week to six months in the past.
The previous record for its refinancing operations was 348.6 billion euros in two-week funds at 4.21 percent as crisis-hit banks bolstered their balance sheets in December 2007 for the crunch year-end period.
"My guess is that the ECB is pretty pleased with the result" this time, said Goldman Sachs economist Erik Nielsen.
He noted that a "huge number of banks," 1,121, had taken up the ECB loans.
Elga Bartsch at Morgan Stanley said her bank thought "the ECB's strategy of passive QE, where it guarantees full allocation of all bids at a fixed rate, is preferable to active QE" as practiced by its peers, which could fuel inflation.
Citi economist Juergen Michels was less sure.
"It is questionable if the ECB's measures, which solely focus on the banking sector, will be successful in improving overall financing conditions," he said.
It might have been the commercial banks' only chance to get a one-year loan at the ECB's lowest rate ever.
The central bank has said that in subsequent one-year operations -- others are scheduled in late September and mid December -- the rate could climb depending on market conditions.
Wednesday's operation raised the ECB's total outstanding market loans to a record 897 billion euros amid a financial crisis that spiked with the collapse of US investment bank Lehman Brothers in September 2008.
By providing massive amounts of cash to commercial banks, the ECB wants to lower the cost of borrowing by companies and individuals, and spur economic activity.
Money markets influenced by central bank operations determine the flow of credit for vast numbers of people, from managers trying to fund their businesses to families and students seeking mortgages and personal loans.
The ECB's move initially pushed the benchmark 12-month euro interbank offered rate (Euribor) to a record low of 1.57 percent, analysts said.
Capital Economics economist Daniele Antonucci also warned however that "there is no guarantee that eurozone banks will use this extra liquidity to lend to the broader economy."
Michels said the ECB would probably "wait and see" if banks passed on the credit and leave its key rate at 1.0 percent for long period in the meantime.
Prominant ECB director Axel Weber, head of the German central bank, said Tuesday: "It is not necessary" to take further measures now.
But he also warned that if banks did not increase lending, the ECB would have to by-pass the banking sector with direct asset purchases.
The ECB has already decided to buy 60 billion euros in low-risk corporate bonds over the next year to jumpstart an important business finance market.
Date created : 2009-06-24