ECB again dishes out cheap money to ailing banks | Business| Economy and finance news from a German perspective | DW | 29.02.2012
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ECB again dishes out cheap money to ailing banks

The European Central Bank on Wednesday lent some 500 billion euros to banks on the continent, which are still struggling to keep afloat amid the ongoing debt crisis. It's the second such operation since December.

Banks took 529.5 billion euros ($713 billion) on Wednesday at the European Central Bank's second large-scale distribution of three-year funds, in an attempt to be better positioned to fight the eurozone crisis.

The ECB loans were dished out at a record-low interest rate of one percent. Borrowers have the option of paying back all or parts of the loans at any time after one year.

Altogether 800 banks jumped at the offer, fueling hopes that more credit would actually flow to businesses and that government borrowing costs would ease further.

The ECB expects a range of beneficial effects from the lending operation, including bolstering trust in banks, easing the threat of a severe credit crunch and not least stimulating banks to buy Italian and Spanish sovereign debt.

No cure-all

Following Wednesday's and last December's two lending initiatives, the ECB looks unlikely to launch a third such operation. The ECB is worried that banks are becoming too dependent on its funds, and it wants governments in the eurozone to regain control over ways of tackling the debt crisis.

"With the ECB's supporting measures time is being won," said Michael Kemmer, managing director of Germany's BdB banking association. "But these measures can neither replace a functioning inter-banking market nor solve the debt crisis," he added.

Italian banks for instance had taken more than 200 billion euros in such funds by January, with banks in Spain and Italy not far behind, simply because they weren't able to get fresh money anywhere else.

In December's first round of the ECB's large-scale allotment, German banks were rather reluctant to accept the offer. They feared it would ruin their reputation, because market players might have considered them as too unstable.

hg/ng (dpa, Reuters)