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ECB pumps a fresh $700 billion into euro banks

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The European Central Bank said Wednesday that it had provided some 800 banks in the euro region with more than $700 billion in three-year loans, an infusion of relatively long-term cash meant to help stabilize the currency zone’s troubled finances.

The volume of loans and the number of banks participating exceeded expectations, and financial firms used much of the money to simply retire shorter-term ECB loans that were coming due.

But the lending operation still amounts to an injection of perhaps $300 billion into a financial system that last fall seemed to be veering toward a full-on, damaging credit freeze.

Reacting to this and other recent developments, Italian Prime Minister Mario Monti went so far as to say that he felt the worst of the euro crisis was over.

Italian interest rates, which spiked toward a danger zone in the fall, are undergoing “a steady, although gradual decline in the last several weeks,” Monti said in an interview in Rome with Bloomberg News.

“I don’t see honestly any reasons why this course should change,” he said.

This week’s lending is the second large infusion that the ECB has made in recent weeks under a program credited with holding down borrowing costs in troubled countries such as Italy and Spain and reducing the risk of any major bank failures in the near future.

The loan amounts announced Wednesday are even more than the ECB provided in late December, and the number of banks that took advantage of the program jumped by around 300.

As with the first round of lending, analysts said they expect banks to use the money in part to meet their own cash needs — and to avoid having to raise money on private markets at a time when they are likely to pay a premium, and certainly more than the cheap terms offered by the ECB.

But some of the money is also likely to be plowed into the government bonds of countries such as Italy and Spain, rekindling demand for the debt of those nations on the assumption that their problems will be sorted out before the three-year loans become due.

Despite the benefits, some analysts have criticized the loans as potentially addictive for euro-region banks — particularly if the regional economy does not improve in the coming years.

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