ECB lends almost a half a trillion Euros to ease EU bank lending

December 21, 2011 by · Leave a Comment
Filed under: Credit News 

First off, Happy Holidays.  It has been quite busy for me this time of year.   I heard about this story in the morning and thought it was a bridge to no-where because these “loans” are repurchase agreements or REPOs.  Again they are trying to solve a debt crisis by issuing more debt.  On top of that, they are basically giving away free money to creditors that made bad decisions in the hope they will be able to ride the “float” (interest) all the way to a solid balance-sheet.

Its the worst form of social welfare you can have.  When sophisticated people invest capital, there has to be real risk of loss or they will not be prudent with their money.  Now this is not just a rant against another bad program.

I was watching Bloomberg TV on the Pimm Fox show today and maybe it was my more conspiratorial side but they had an expert on the show, explaining this deal and talking about its merits.    Near the end of the segment, they were talking about senior creditors and the guest mentioned the fact that they had to pledge assets to secure these loans and how these loans were structured, the ECB was now in fact the most senior creditor and this was a little talked about fact.  At that time, the sound cut out while he was finishing his point.  Maybe it was just a technical glitch but it was very timely and I really wanted to hear what he finished with.   Maybe it is just me, but I wonder if the other creditors to these 500+ banks understand that has just happened if this is the fact in the matter?

New York Times – After more than a year of frustrating and mostly fruitless summit meetings of European political leaders, the European Central Bank appears to have found a more promising way to ease the euro zone crisis: give money to banks at bargain-basement rates.

The E.C.B., making an offer too good for Europe’s banks to refuse, reported Wednesday that it had doled out almost half a trillion euros in low-cost three-year loans to keep credit flowing at a time when European banks are finding it all but impossible to finance their operations through normal market channels.

The lending reduces the “risk of a Lehman-type situation, where banks go into the new year facing a wave of refinancing and are unable to access the market,” said Jacques Cailloux, the chief euro zone economist at Royal Bank of Scotland.

But it is probably only a temporary solution. By acting essentially as a lender of last resort to the European financial system, the E.C.B. managed mainly to buy time for Europe to work out its longer-range problems of excessive debts, lagging economic competitiveness and limited fiscal unity.

The E.C.B. allocated €489.2 billion, or $639 billion, to 523 institutions, well above the roughly €300 billion estimate of analysts polled by Reuters and Bloomberg News.

Even as Mario Draghi, the new E.C.B. president, continues to resist calls to stand directly behind sovereign debtors without limit, the scale of the liquidity injection suggested that the E.C.B. is prepared to indirectly support them through the banking system.

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