The European Central Bank auctioned off $50 billion in one-day loans on Tuesday to combat the credit crunch. But experts say such temporary injections of liquidity won't solve the financial crisis.
Experts say short jabs are good but won't cure the disease
The additional credit comes on top of $30 billion the ECB made available on Monday, September 29.
The injections, the bank has said, are necessary to combat global banking jitters which worsened after the US House of Representatives rejected a $700 billion aid package to buttress US financial markets on Monday.
Amidst the uncertainty, banks are wary of lending money to one another. Instead, financial institutions chose to deposit some 44.4 billion euros ($63.5 billion) with the ECB overnight between Monday and Tuesday.
The interest banks receive from the ECB is less than the prime rate they could receive from each other, but that is of secondary importance.
"Security has become more import than profits," Kornelius Purps, an analyst at Unicredit, one of Europe's leading financial groups, told Reuters news agency.
You gotta have faith
The European Central Bank is trying to stave off a crisis
Financial experts have praised the ECB's active approach. But they caution that short-term liquidity infusions are not going to fix the global credit crisis.
"The ECB can't solve the problem with injections of money, even if they are initially good for banks," Commerzbank Senior Economist Michael Schubert told Reuters.
The current finance crunch has less to do with money availability than money psychology.
"The financial crisis has become a global crisis of faith," Schubert said. "Trust can only be restored when all the risks and possible losses have been made public."
There has been speculation that the ECB might also lower interest rates this week. Although there has been no official confirmation that such a plan is in offing, the mere idea of it helped sparked minor rallies on European stock exchanges on Tuesday.
State bailouts raise questions
The EU wants a closer look at the proposed HRE deal
Meanwhile, national governments continue to prop up and in some cases partially nationalize troubled banks. On Tuesday, the French-Belgian-Luxembourgian institution Dexia became the latest in a long line of institutions to receive assistance.
On Monday, Germany provided 35 billion euros ($50 billion) to help Hypo Real Estate, or HRE, but such bailouts potentially raise thorny legal issues.
Some have questioned whether they violate EU rules against state subsidies. And the EU said that Berlin did not consult with Brussels in advance about the HRE rescue plan, although notification was made later.
"The German authorities have indicated that they will be giving us more details once the package has been finalized by parliamentary procedures," Jonathan Todd, spokesman for the European Commissioner on Competition, told DW-Radio.
"At this point it still has to be verified whether that measure taken for Hypo Peal Estate constitutes state aid or not."
But shouldn't the rules be relaxed in view of the crisis?
"There is no suggestion that we should suspend the application of the state aid rules," Todd said. "The state aid rules have proven a very good framework to ensure a coordinated response to these problems. They're part of the solution rather than the problem."
But national governments still face the possibility, however remote, that bailout measures could be found to violate EU guidelines.