ECB Floods World Financial System With €529.5 Billion in Loans
Jessica Menton | Mar 1, 2012 9:10am EST | 1min:44sec
The European Central Bank gave the world's financial system a €529.5 billion Leap Year Day gift, providing financial institutions with that amount in 1 percent-interest, three-year loans this week. The lending action had been widely expected by the market, although the amount to be loaned was unknown. Market observers, who forecasted the take-up in loans from the euro zone's central bank could range anywhere from €300 billion to €1 trillion, had worried the latest liquidity injection could send negative signals to the market if it either underperformed or exceeded certain benchmarks.
Others pointed out a very large amount of lending could prompt political backlash against Europe's central bankers who would be seen as supporting bank profits with their largesse. The ECB began its second round of lending Tuesday to aggressively increase liquidity in the euro zone financial system, and announced the results of its operation at 5:20 New York time Wednesday.
The liquidity is meant to prop up the tattered European banking and sovereign credit funding systems, and follows a first round disbursed in December 2011 to 523 banks that totaled €489 billion ($658 billion). Estimates of the amount to be taken up by banks this time around varied widely, with surveys of investors and other market participant expectations consistently overstating the estimates given by bank-affiliated strategists.
The consensus view was that the level of lending would be close to, but somewhat less, than during the previous round of loans. Those expectations were exceeded, as both the amount lent out and number of participating institutions increased. The injection of liquidity does not address the fundamental issues behind the broken credit system in Europe, which has several insolvent nations at risk of becoming illiquid and is seeing loan growth to non-financial corporations decline. All other things being equal, it is also likely to cause the continent's currency, the euro, to lose value.
