InfoAnda - ECB boosts loans to 1 trillion Euro to stop credit crunch

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Read more with google mobile : ECB boosts loans to 1 trillion Euro to stop credit crunch

The European Central Bank (ECB) will issue a second round of cheap three-year loans on Wednesday (29 February) in order to help cash-strapped eurozone banks. In total, the bank is lending almost €1 trillion after it already injected some €500 billion into the system in December because euro-area banks became wary of lending to each other. The programme has so far been used mainly by Spanish and Italian banks to shore up funding gaps and buy government bonds. But it has done little to boost confidence in the sector, as evidenced by the record sums being 'parked' overnight in the ECB instead of circulating among lenders. On Tuesday, for instance, €475 billion was given to the ECB for safe-keeping - almost the same sum that was to be made available in cheap loans. Nordic banks such as Sweden's Nordea and Swebank said they would not take up the loans as they come with a 'stigma' of a bank in need of help. Even though Sweden is not a euro-country, its banks are eligible for the loans because they have branches in eurozone states, such as Estonia and Finland. Meanwhile, Greek banks will not be able to tap the funding after Standard & Poor's downgraded the country to 'selective default,' which technically prohibits the ECB to take on Greek bonds as collateral for loans. Emergency funding is available to Greek banks via the country's central bank, however - pending a decision by eurozone finance ministers on Thursday to let the temporary eurozone bail-out fund, the European Financial Stability Facility, to guarantee loans up to €35 billion. For its part, the Fitch ratings agency has warned the ECB's unorthodox cash injection will only 'delay the collapse of weak banks.' An economist from the ING Bank told this website that the programme amounts to a 'sophisticated way of printing money' even though the massive loans are not 'real money' issued in by euro printing presses, but 'electronic money' which stays inside the system unless banks give it out as cash to individual customers. 'This will not automatically lead to inflation, only if commercial banks pour all money they get into the real economy,' Carsten Brzeski explained. 'The credit crunch has not been avoided yet. The risk is still out there and the crisis is not over. There is still lack of liquidity in some banks and lack of demand for government bonds.' If some of the banks taking ECB loans go bust down the line or their collateral proves worthless, the ECB's own balance sheet would suffer. Diego Valiante from the Centre for European Policy Studies, a Brussels-based think tank, said the real problem is that EU institutions have prohibited the ECB from helping governments directly, forcing it to expose itself to the more risky bank loan option. 'This additional cheap liquidity in the system is very risky for the ECB and the entire system. It creates a moral hazard for banks not to restructure and delays the problem even more,' he told EUobserver.

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