ECB Opens Up $700 Billion Lifeline

The Frankfurt-based European Central Bank has announced it provided some 800 banks in the euro region with more than $700 billion in additional liquidity, in its second part of its long term refinancing operation (LTRO).

The central bank’s efforts in fighting the bailout crisis are now entering its third year and the ECB’s €529.5 billion ($712.81 billion) three-year low-interest loans have largely met the expectations of analysts and investors.

The Frankfurt-based European Central Bank has announced it provided some 800 banks in the euro region with more than $700 billion in additional liquidity, in its second part of its long term refinancing operation (LTRO).

The central bank’s efforts in fighting the bailout crisis are now entering its third year and the ECB’s €529.5 billion ($712.81 billion) three-year low-interest loans have largely met the expectations of analysts and investors.

The latest funding also exceeds the previous LTRO in late December, when the ECB dispensed €489.2 billion in similar loans to 523 banks.

Despite Mario Draghi refusing the label ‘lender of last resorts’, the eleventh-hour intervention by the ECB helped spur a huge rally in Spanish and Italian debts which had threatened to go critical. Back in December, Italian and Spanish government bond yields had spiked so high, sparking fears of a funding drought.

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And while the ECB does not openly reveal the identities of banks that borrowed, several European banks have reported their participation in the latest LTRO.

Spain’s Banco Bilbao Vizcaya Argentaria borrowed €11 billion in December, while Britain’s Llyods Banking Group took out £11.4 billion ($18.1 billion) after not participating in the previous round. Italy’s Intesa Sanpaolo SpA borrowed €24 billion, doubling the 12 billion it took two months earlier.

Standard Chartered Bank stayed away from the loans, with CEO Peter Sands saying that the bank would ‘never’ access this kind of funding despite the low 1 percent interest rate. Standard Charted reported yesterday a record 3.53 billion euros in net profit last year, boosted by strong performances in developing markets.

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The Wall Street Journal reports:

[quote] The ECB’s Long-Term Refinancing Operation, or LTRO, has emerged as perhaps the most potent weapon in Europe’s crisis-fighting arsenal.

Before it was announced late last year, ECB loans generally had to be repaid within about a year at most. Now banks can borrow virtually unlimited amounts for three years at a 1% interest rate, well below what they would pay to borrow elsewhere. The ECB money comes with no strings attached, so banks can invest or lend it as they please. [/quote]

While the latest round of LTRO will not be the cure for Europe’s problems, it can help stave off the eurozone’s sovereign debt crisis.

As Simon Nixon aptly observed:

[quote] The LTRO is no panacea for the euro zone’s economic problems. True, the ECB loans averted a nasty credit crunch and easier financial conditions will provide some support to the real economy. But banks are unlikely to use LTRO money to fund new loans to businesses and households which typically have maturities beyond three years; most banks will anyway continue to deleverage to meet new capital rules. Any lasting boost to the real economy will depend on banks and governments pushing ahead with restructuring and reforms to boost productivity and competitiveness. [/quote] 

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