European Central Bank injects euro 489 billion into eurozone banks

FRANKFURT: Banks took a huge euro 489 billion at the European Central Bank’s first ever offering of three-year funding on Wednesday, raising hope a credit crunch can be avoided and that the money may be used to buy Italian and Spanish bonds.

A total of 523 banks borrowed money at the tender with demand way above the euro 310 billion expected by traders polled by Reuters in the run-up to the operation.

The banks’ lunge for funding pushed the euro to a one-week high versus the dollar and sparked a rally in stocks. The three-year loans are the ECB’s latest bold attempt to ease the eurozone’s troubles. It is the most the bank has ever pumped into the financial system, topping the near 450 billion it injected with its first one-year loans back in 2009.

Its hope is that the ultra-cheap and ultra-long funding will have a range of beneficial effects, including bolstering trust in banks, easing the threat of a credit crunch and tempting banks to buy Italian and Spanish bonds, thereby calming markets and easing the currency bloc’s sovereign debt crisis. “The take-up was massive ... much higher than the expected euro 300 billion.

Liquidity on the banking system has now increased considerably,” said Annalisa Piazza at Newedge Strategy, adding that the take-up probably came largely from banks in the eurozone’s debtladen states.

While an interbank lending crunch may have been avoided, it is much less certain banks will use the money to buy Italian and Spanish government debt, as French President Nicolas Sarkozy has urged, given the competing pressures on them to cut risk, rebuild capital and lend to business.

“While this might help to address recent signs of renewed tensions in credit markets and support bank lending, we remain sceptical of the idea that the operation will ease the sovereign debt crisis too as banks use the funds to purchase large volumes of peripheral government bonds,” said Jonathan Loynes, Chief European Economist at Capital Economics.

Given those doubts, most market experts say only more aggressive and direct buying of government bonds by the ECB will help ameliorate the crisis, something it is reluctant to do. Banks switched 45.7 billion out of one-year loans taken from the ECB back in October.