Banks rush for more cheap money
Last week (w/c 27 February) the European Central Bank (ECB) injected another huge shot of adrenalin into the eurozone financial system with its second tranche of longer-term refinancing operations (LTRO) totalling €530 billion. This time 800 banks took advantage of the Bank’s cheap (1% p.a. 3 year loan) deal compared to 500 or so last time.
Italian and Spanish banks dominated the take-up, accounting for almost half the funds on offer, as they did last December when they accounted for 46% of the funds made available. Italy’s Intesa Sanpaolo and Spain’s Bankia took 10% between them, with Dexia and UniCredit not far behind. There were two surprises; Lloyds Banking Group took €13 billion, the largest take-up by a non-eurozone institution, and half of the 800 banks involved were German.
A much-needed financial boost
It appears that Mario Draghi’s latest cash injection has been well received as it has given banks much-needed time to begin to repair their balance sheets and bolster their capital ratios. Further confidence in banks is essential to address another vital component of the money markets - a return to a healthy level of inter-bank lending.
But there is still work to be done in the eurozone as last week demonstrated; Portugal is struggling to reduce its deficit and Spain told eurozone leaders that it would not meet its target to cut its budget deficit to 4.4% of GDP this year.
Such was the success of the ECB’s boost it meant that, refreshingly, for once, Greece hardly had a mention. So has the eurozone crisis finally been resolved? Almost certainly not, but what has been bought is time: it has enabled the Germans to further implement their plans for full fiscal integration of eurozone members. On Friday, European leaders approved new rules to curb government borrowing and allow them to claim that the emergency measures had settled financial markets and that the worst of the crisis was over. However Nicolas Sarkozy maintained an air of caution when he said: “We have not exited the economic crisis but we are turning the page’.
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