Wednesday June 24, 12:10 PM
Eurozone banks in record ECB loan offer
By William Ickes
FRANKFURT (AFP) - The European Central Bank lent commercial banks a record 442.24 billion euros (620 billion dollars) at 1.0 percent Wednesday via its first offer of 12-month funds, aiming to boost credit flows.
The previous record for the central bank's refinancing operations was 348.6 billion euros in two-week funds on December 18, 2007 as crisis-hit commercial banks bolstered their balance sheets during the crunch year-end period.
Analysts at UniCredit (Milan: UCG.MI - news) markets expected the ECB's move to result in lower rates charged by commercial banks for longer-term borrowing in general.
If that happens, interest rates overall could also remain low, a crucial contribution to recovery as the eurozone grapples with what is expected to be a sluggish rebound from the worst global recession in more than 60 years.
In Paris, the OECD group of 30 advanced economies meanwhile urged authorities to keep interest rates exceptionally low and to continue to support the financial sector until a sustained recovery is underway.
The ECB has resisted the so-called 'quantitative easing' (QE) practiced by the US Federal Reserve and Bank of England (BoE) -- essentially printing money to buy government and private debt to boost recession-hit economies.
The ECB instead has generated a flood of cash through loans that will now extend to 371 days, or 12 months, from one week to six months in the past.
"I suspect that the ECB is very pleased with today's outcome," said Goldman Sachs (NYSE: GS - news) economist Erik Nielsen. "It's a big number, providing the intended monetary easing by stealth."
Counterpart Elga Bartsch at Morgan Stanley (NYSE: MS - news) said her house continues "to think that the ECB?s strategy of passive QE, where it guarantees full allocation of all bids at a fixed rate, is preferable to active QE" as practiced by its peers, which could fuel inflation.
On Wednesday, the ECB also lent a much smaller amount, 6.43 billion euros, for three months at the same rate of 1.0 percent.
Eurozone banks will pick up all of the funds on Thursday, a statement said.
Analysts were sure the banks would leap at the chance to get an unlimited one-year loan at the ECB's lowest rate ever.
The central bank has said that in subsequent one-year operations -- the next are scheduled in late September and December -- the rate could be higher depending on market conditions.
By providing huge amounts of cash to commercial banks, the ECB wants to lower the cost of borrowing by companies and individuals, and spur economic activity.
Money markets influenced by central bank operations determine the flow of credit for vast numbers of people, from managers trying to fund their businesses to families and students seeking mortgages and personal loans.
Bartsch said that it would only become clear over time if the record demand on Wednesday represented fresh appetite for funds or was mostly a substitute for short-term funding.
The latter possibility would "give the banking system more visibility" she said, and possibly ease the chronic tension on the credit markets.
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