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« Is Gold Backwardation Now Permanent? | Main | Gold Market Of The 70s Was A Dress Rehearsal »

ECB Allots €529.5 Billion in Long-Term Refinancing Operation


LONDON—The European Central Bank said it handed out €529.5 billion ($712.7 billion) in cheap, three-year loans to 800 lenders, the central bank's latest effort to arrest a financial crisis now entering its third year.

Wednesday's loans were on top of the €489 billion of similar loans the ECB dispensed to 523 banks in late December. The ECB's goal is both to avoid an escalating crisis as banks struggle to pay off maturing debts and to mitigate a sharp pullback in bank lending to customers across ailing European economies.

The roughly €530 billion takeup of this week's loans was roughly consistent with what bankers, investors and analysts had expected. Surveys by multiple investment banks this week found that investors expected banks to borrow more than €500 billion, although some analysts had anticipated a smaller amount.

The ECB doesn't disclose the identities or locations of the banks that borrowed, hoping to avoid any stigma being attached to the program. But about two-thirds of the loans went to banks in three euro-zone countries—two in the "periphery," likely Spain and Italy, and one in the "core," likely France or Germany.

A flurry of European banks reported that they participated. In Spain, Banco Bilbao Vizcaya Argentaria SA, which borrowed €11 billion in December, said it tapped a similar amount this week. British lenderLloyds Banking Group PLC took £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.

"It's giving us an insurance policy against having any liquidity shock," Intesa Chairman Andrea Beltratti said in an interview.

Market reaction to the news was muted. The euro barely budged against the dollar. Shares of several top European banks inched higher in afternoon trading, relinquishing some of their earlier gains.

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

Before the three-year loans were announced late last year, ECB loans generally had to be repaid within about a year. Now banks can borrow virtually unlimited amounts for three years at a 1% interest rate, well below what they would pay to borrow from scarce market sources. The ECB money comes with no strings attached, so banks can invest or lend it as they please.

The first installment of ECB liquidity in December largely eliminated the risk that a bank would suddenly keel over because it ran out of money. It also reduced the odds that banks would have to dump huge quantities of assets to reduce their funding needs.

And some banks, particularly in Spain and Italy, used portions of the funds to buy bonds issued by their governments. That provided a much-needed boost to demand for those bonds during a period when most investors remained skittish, and it helped reduce government borrowing costs.

But many banks primarily used the funds to pay down maturing debts or simply deposited the money at other banks or at the ECB itself. The infusion fell short of some politicians' hope that it would stimulate bank lending to customers in struggling European economies.

Now the question is whether banks will use the second dose of ECB liquidity to finance new loans and investments, especially to individuals and small businesses that have been starved of credit amid the banking crisis.


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