By DAVID ENRICH And CHARLES FORELLE
LONDON—The European Central Bank handed out €529.5 billion ($712.81 billion) in cheap, three-year loans to 800 lenders, the central bank’s latest effort to arrest a financial crisis now entering its third year.
Wednesday’s loans were on top of the €489.2 billion of similar loans the ECB dispensed to 523 banks in late December. The ECB’s goal is to help struggling banks pay off maturing debts and to coax them to lend to strained governments and customers. The takeup of this week’s loans was roughly consistent with what bankers, investors and analysts had expected.
European Pressphoto Agency
Mario Draghi, president of the European Central Bank.
The December loans helped spur a large rally in Spanish and Italian debt, particularly among bonds that are maturing before the ECB loans must be repaid. This time, Spanish and Italian two-year bonds saw modest gains, pushing down yields. The price of Italian 10-year bond, a key indicator of investor confidence in the euro zone, also strengthened, pushing the yield to 5.19% compared with 5.31% before the ECB disclosed the size of its lending.
Still, the market reaction was generally muted, a sign of the program’s unsurprising size. The large pool of liquidity is enough to ease concerns that bond markets could dry up but not so big to suggest that there will be huge volumes of cash tumbling into the markets.
Euro Zone Crisis Tracker
See economic, political and markets news from across Europe as governments and financial institutions deal with the continuing debt crisis.
The ECB doesn’t disclose the identities of the banks that borrowed, hoping to avoid any stigma being attached to the program. About two-thirds of the loans went to banks in three euro-zone countries—two in the so-called “periphery,” likely Spain and Italy, and one in the “core,” likely France or Germany.
A flurry of European banks reported that they participated. In Spain, Banco Bilbao Vizcaya Argentaria
SA, which borrowed €11 billion in December, said it tapped a similar amount this time. British lender Lloyds Banking Group
PLC took £11.4 billion ($18.1 billion) after not participating in the previous round. Italy’s Intesa Sanpaolo
SpA borrowed €24 billion, doubling the 12 billion it took two months earlier.
“It’s giving us an insurance policy against having any liquidity shock,” Intesa Chairman Andrea Beltratti said in an interview.
The ECB’s Long-Term Refinancing Operation, or LTRO, has emerged as perhaps the most potent weapon in Europe’s crisis-fighting arsenal.
Before it was announced late last year, ECB loans generally had to be repaid within about a year at most. Now banks can borrow virtually unlimited amounts for three years at a 1% interest rate, well below what they would pay to borrow elsewhere. The ECB money comes with no strings attached, so banks can invest or lend it as they please.
A similar “carry trade” phenomenon helped U.S. banks emerge from the 2007-2008 crisis.
The first installment of ECB liquidity in December largely eliminated the risk that a bank would suddenly keel over because it ran out of money. It also reduced the odds that banks would have to dump huge quantities of loans and other assets to reduce their funding needs.
Some banks, particularly in Spain and Italy, used portions of those funds to buy higher-yielding bonds issued by their governments at a time when most investors remained skittish, and it helped reduce government borrowing costs.
But many banks primarily used the funds to pay down maturing debts or simply deposited the money at other banks or with the ECB itself, even though they yield less. The infusion fell short of some politicians’ hope that it would stimulate bank lending to customers in struggling European economies.
The question now is whether banks will use the second dose of ECB liquidity to finance new loans and investments, especially to individuals and small businesses starved of credit amid the banking crisis.
Intesa’s Mr. Beltratti, for example, said the lender will use a chunk of the €24 billion it borrowed this week to buy Italian government bonds with maturities of three years or less. “There is still grounds for a profitable trading strategy,” he said, adding that the bank also will plow the money into new loans.
“The first LTRO was essentially to get rid of the wall of banking debt,” Bank of France Governor Christian Noyer said in an interview. “The second LTRO will be more about lending, as it could bring enough funds for banks to be proactive.”
One hopeful sign is the 53% increase in the number of banks availing themselves of the loans. That suggests many smaller banks across the Continent participated for the first time. Such banks tend to be more focused than larger ones on lending to small and midsize businesses, so that possibly could hasten the trickle-down effect of the ECB cash.
In Spain, some small lenders borrowed for the first time this week, thanks partly to the ECB allowing a wider range of assets to be pledged as collateral to get loans. The program “has at least slowed the decline in the flow of credit,” said the head of liquidity management at a small Spanish savings bank, although he noted that “in the short term, this won’t create much lending.”
While the ECB’s loan program is widely credited with averting a possible financial disaster, some bankers and other experts fear that lenders might grow addicted to the central-bank funds.
“It’s not clear what the exit strategy or long-term consequences are,” said Peter Sands, chief executive of giant British bank Standard Chartered
PLC, which didn’t borrow funds. “What happens in three years when it needs to be refinanced?”
For some smaller banks, reliance on the ECB loans “is merely stalling recognition of fundamental weaknesses,” said Bridget Gandy, co-head of European financial institutions at Fitch Ratings.
Other analysts, however, say the cheap loans will help banks gradually repair their balance sheets.The actual amount of new liquidity as a result of the ECB loans is less than meets the eye. That is because billions of short- and medium-term ECB loans mature this week, so the net new amount of liquidity is about €310 billion.The total net amount of new liquidity as a result of the two batches of loans is about €520 billion.
—Sara Schaefer Muñoz, Max Colchester, Brian Blackstone and William Horobin contributed to this article.
Write to David Enrich at firstname.lastname@example.org and Charles Forelle at email@example.com
A version of this article appeared Mar. 1, 2012, on page C1 in some U.S. editions of The Wall Street Journal, with the headline: ECB Gives Banks Big Dollop of Cash.