ECB lends £409bn to eurozone banks


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The Independent Online

The European Central Bank (ECB) today revealed it had lent nearly 489 billion euro (£409.3 billion) to the continent's banks in a bid to boost confidence in the eurozone.

The ECB said 523 un-named banks had taken up the loans, which will be offered on a three-year term for the first time, in the biggest liquidity operation ever for the central bank, surpassing the 442 billion euro (£369 billion) in one-year loans in June 2009.

The move boosted sentiment towards the wider sector with Royal Bank of Scotland, Lloyds Banking Group and Barclays all climbing to the top of the FTSE 100 Index.

But Martin van Vliet, analyst at ING Bank, said doubts remain over whether the money will be used to support weaker eurozone economies.

He said while the take-up was "massive", the number of banks involved was smaller than the 1,121 two years ago, which suggested the participating banks were concentrated in the weak periphery of the eurozone.

He said: "We doubt whether the money will be used extensively to fund purchases of peripheral debt, given concerns about mark-to-market risks and possible reputation risks."

The ECB earlier this month unleashed further emergency measures to rescue the struggling eurozone, including slashing interest rates for the second time in five weeks, to 1%, and offering more lenient terms on loans.

The ECB move comes as economists expect the eurozone to enter a mild recession in 2012 - which would make it even harder for debt-laden governments such as Italy to get a handle on their debt burdens.

The 37-month term of the most recent round of loans allows banks to get the money need to pay off large chunks of their own maturing debts in the first part of the new year.

Fears have been raised that if banks cannot borrow to meet their debts they will cut back on the loans to businesses and will no longer lend to each other - effectively starting another credit crunch.

Louise Cooper, markets analyst at BGC Partners, said: "The fact that ECB is taking this step is a good thing, it is helping to alleviate some of the strains within the system and does on the margin help banks fund themselves."

She added: "However, the bigger picture is that ECB is taking these steps because wholesale interbank markets are not working normally and they are not working normally because many in the markets are worried that some banks are insolvent."