ECB Lending Exceeds Expectations

Joel Anderson  |

The new low-cost unlimited 3-year lending program initiated by the European Central Bank (ECB) appears to have been very successful. Though, market reactions would seem to indicate that investors think they were a little TOO successful. With 523 banks requesting a grand total of $628 billion in loans, it appears as though ailing financial markets may have been in worse shape than was previously realized, pushing stocks down in early trading today.

Lending Plan Aims to Increase Liquidity

While Draghi has fended off calls for an aggressive program of bond-buying by the ECB to bolster the governments of Italy, Spain, and other struggling eurozone nations for weeks, the new program of offering loans at a rate of 1 percent appears to have gotten at least some traction. The lending program, referred to as "long term repurchasing operations," had widely different predictions for how much money would be loaned out, but analysts polled by Reuters and Bloomberg News had anticipated around $400 billion. "The take-up was massive ... much higher than the expected 300 billion euros. Liquidity on the banking system has now increased considerably," said Annalisa Piazza at Newedge Strategy.

Stocks Edge Downward

The influx of cash was the biggest ever by the ECB, dwarfing the close to $575 billion it lent out in June of 2009 to help after the Lehman Brothers collapse. The eye-popping numbers also meant that the markets appeared to have renewed concerns about the overall health of the banking system in Europe even as the ECB offered up the funds to fix it, and markets edged down on the news. The Dow Jones and S&P each lost just over 0.5 percent while the Nasdaq dropped about 2 percent in early trading.

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Maturing Debt in 2012 Hindering Liquidity

The primary goal of the lending was to free up money for lending, primarily between major banks and from banks to eurozone governments. Banks typically cover short-term shortfalls by issuing unsecured bonds, a practice that fell on hard times since July when worries about the collapse of certain eurozone nations began to drive away investors. European banks were only able to issue about $100 billion in unsecured bonds in the second half of 2011, down from $312 billion last year and $334 billion the year before, according to Dealogic. What's more, European banks have an estimated $300 billion worth of bonds maturing in the first three months of 2012 alone according to Nick Matthews, an economist at the Royal Bank of Scotland (RBS). As such, much of the cash from the ECB went to simply refinancing existing debt, with just under $250 billion representing actual fresh liquidity.

The jury's still out as to whether or not the ECB's lending program will garner the results it desires in the long term. “This reduces the tail risk of a Lehman-type situation, where banks go into the new year facing a wave of refinancing and are unable to access the market,” Jacques Cailloux, chief euro area economist at Royal Bank of Scotland, told The New York Times. Cailloux, though, continued, cautioning that while investors appeared to be relaxing some "“we’ll see if this is sustained. I don’t want to downplay the importance of the E.C.B.’s action, but the euro’s problems are bigger than that, with political and economic dimensions that still need to be addressed.”

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