Banks grab latest ECB cheap loans

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Banks grab latest ECB cheap loans

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The European Central Bank unleashed a second round of low-interest loans to banks on Wednesday totalling 529.5 billion euros.

The massive credit infusion is part of ECB President Mario Draghi’s attempt to ease the eurozone debt crisis. Draghi has urged banks to lend out the funds to households and businesses, to help strengthen economic growth.

Since December the ECB has injected more than one trillion euros into the financial system.

The number of banks taking the latest cheap three-year funds at a one percent interest rate totalled 800 compared with 523 banks for the December loans.

The idea is that borrowing costs will ease for governments hit by the eurozone crisis, which has happened, but the head of Britain’s central bank, Mervin King, pointed out the cash is not being used as Draghi intended: “The idea that the long-term repo operations have eased the supply of finance to small businesses in the euro area is a myth. What it’s done is to provide a source of funding to banks — particularly in the southern member countries of the euro area — which were experiencing a bank run, enabling them to fund the withdrawal of funds that was occurring and was essentially a bank run in the second half of last year, and that money is flowing to banks in the northern part of Europe.”

Some banks in financially-pressed countries such as Italy and Spain do appear to have used the cheap money to buy government bonds.

That has brought down borrowing costs, especially on shorter-term bonds, and has taken some of the pressure off governments such as Spain and Italy.

The ECB hopes that that trend will accelerate with some of the new money being made available.

Indeed as the Bank released the new cash the cost of borrowing for Rome and Madrid continued to fall.

Analysts do not expect there to a third funding operation.

The strategy has somewhat calmed the euro zone crisis and given governments time to work out sustainable budget and growth policies for affected countries on the periphery of the bloc.

“With the ECB’s supporting measures time is being won,” said Michael Kemmer, managing director of Germany’s BdB banking association. “But these measures can neither replace a functioning interbanking market nor solve the debt crisis.”