The European Central Bank (ECB) has offered a massive cash injection by offering three year loans to banks in an attempt to inject investor confidence in the eurozone.
European banks have the first of two opportunities to get the three-year money on Wednesday, as the ECB hopes to sell up to $590bn worth of loans.
"If the banks form a kind of cartel and extend that help to the governments, the ECB might be helping sovereigns indirectly"
- Christian Schulz,
It is the ECB's latest and most dramatic attempt so far to help banks bolster their finances.
The move is intended to minimise the chances of banks responding to the current eurozone turmoil by slamming the brakes on lending.
As announced by ECB chief Mario Draghi last week, the central bank is launching its first-ever 36-month refinancing operation, which will effectively take as much funds as banks want available at just 1.0 per cent for a three-year period.
Already 14 Italian banks, including top lenders UniCredit and Intesa Sanpaolo, have listed a total of $50.2bn of state-backed bonds to be used as collateral for the ECB new funds.
Most market analysts welcome the decision, Christian Schulz, Berenberg Bank's senior economist, says, "In contrast to previous long-term financing operations which have seen only modest demand, recently, the brand-new three-year operation was different because it would introduce longer-term funding certainty".
"But it does take this role very seriously for the banks. If the banks form a kind of cartel and extend that help to the governments, the ECB might be helping sovereigns indirectly," Schulz said.
Mountains of debt
However, analysts are not sure if banks will go on to use the money in this way.
Some suggest the money will be used to boost bank balance sheets, especially since the ECB lowered its collateral requirements when it announced the loans, enabling weaker banks to apply for the funds.
The recent intensification of the eurozone debt crisis has left a growing range of banks virtually locked out of open funding markets and reliant on the ECB.
The ECB said on Monday risks to financial stability in the eurozone increased considerably in the second half of this year, largely due to the effects of contagion from the debt crisis and bank funding strains.
Especially as many eurozone governments are having great difficulty in borrowing money on the bond market, and next year eurozone governments must sell huge amounts of bonds to finance their mountains of debt.
The ECB has consistently refused to act as the lender of last resort to the governments, insisting it was up to countries to get their finances in order.
With the measures introduced, banks taking the loans from the ECB at low interest rates will now be able to buy sovereign bonds from countries such as Italy and Spain which offer a much higher yield.
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