THE EUROPEAN Central Bank made a new allotment of ultra-cheap three-year loans to commercial banks today in a fresh bid to shore up the sector and boost lending into the real economy.
With the euro zone in recession for the second time in three years, the initiative comes two months after the ECB lent €489 billion to banks in its first three-year allotment in December.
Amid warnings from the bank’s policymakers that today’s offer will be the final such scheme, estimates of the likely take-up of the loans have ranged from €300 billion to €1 trillion, with many analysts speculating on the likelihood of a take-up of about €500 billion.
The first three-year loan scheme, introduced in the weeks after ECB chief Mario Draghi took charge of the bank, came amid fear of a new credit crunch in the euro zone banking system.
The new scheme, dubbed a “maxi-auction” in Mr Draghi’s native Italy, comes amid renewed divisions in Europe over the size of the euro zone bailout funds.
It also comes after Taoiseach Enda Kenny said that the Government will put Europe’s new fiscal treaty to a referendum.
“The first one was really for the banks to get their house in order,” said ECB governing council Ewald Nowotny, chief of the Austrian central bank. “The second will have an even more direct effect for the real economy.”
Although no euro zone official has said so publicly, the authorities believe commercial banks will use at least some of the money to buy the sovereign bonds of distressed euro countries on the open market.
The bonds of Italy and Spain command significantly higher yields than the ECB’s 1 per cent rate, meaning the scheme gives them an opportunity for profit while shoring up demand for peripheral bonds. Italian 10-year bonds, for example, are currently yielding 5.43 per cent.
With the ECB’s sovereign bond-buying programme on secondary market in abeyance, Mr Nowotny and other ECB figures have all but ruled out the prospect of a further medium-term liquidity scheme for banks.
“If number one was a success and number two was a success, that doesn’t mean there has to be number three,” Mr Nowotny has said.
German Bundesbank chief Jens Weidmann warned in recent days that the latest initiative brought with it a “not insignificant” level of risk. “At this point, I don’t see any necessity to discuss further measures.”
The ECB is making an unlimited amount of funds available against eligible collateral at the average of its benchmark rate – currently a record 1 per cent – over the three-year loan term.
In anticipation of today’s offer, the ECB said yesterday that it was lending €134 billion to banks for one day. These loans settle today, giving banks the opportunity to refinance the money for three years.
Separately, the ECB temporarily suspended the eligibility of Greek bonds for use as collateral in its funding operations. The development comes as the stricken country proceeds with a bond-swap to cut its national debt by up to €107 billion, an initiative which led Standard Poor’s to impose a “selective default” rating on Greek bonds.
The ECB said national central banks may provide “emergency liquidity assistance” to Greece until the activation of a €35 billion collateral enhancement scheme with the European Financial Stability Facility bailout fund.
