As it did in December, the ECB this week again offered inexpensive three-year loans to euro-region banks, and demand was strong. Some 800 banks borrowed around $700 billion -- more banks and more money than were involved in the first rounds of loans.
Much of the money went to retire short-term loans that banks already had outstanding with the ECB. But the operation will still put more than $300 billion of extra cash into the euro zone system. The fact that the loans won’t come due for three years means the banks will be more willing to put the money to use, on the assumption that the region’s economic problems will be sorted out in the meantime.
The long-term loans “further reduce the threat of a credit crunch in parts of the euro region,” Capitol Economics analyst Martin van Vliet wrote of the ECB loan results.
Draghi’s loan program has put the ECB on a fast track to catch the Fed.
The policy has stabilized European finances in recent weeks, contributing in a roundabout way to a decline in the exorbitant interest rates that some heavily indebted governments had to pay. After the first round of ECB loans, banks spent some of the money on government bonds, and Italy and Spain as a result saw a drop in the cost they had to pay to attract bond investors.
The banks also began to retire their own bonds, reducing the competition for money on private markets. And bank lending to households and businesses ticked up.
These were all reassuring developments after an autumn consumed by fears that the region’s debt crisis would lead to a breakup of the euro zone.
“There are tentative signs of stabilization,” Draghi said at a recent news conference on ECB policy.
But some analysts and bankers are warning that the policies under Draghi could leave the European financial industry addicted to cheap ECB loans that will be difficult to replace if the region’s economy remains stagnant.
For a variety of reasons, the euro zone remains in trouble. The region is heading into recession, and governments are scrambling to restructure economies ill-suited to compete globally or support the costs of aging populations.
Greece, the region’s hardest-hit country, is in the midst of a bond restructuring that will shape its future. If all goes smoothly, the exchange of new, less-expensive bonds for older ones will greatly reduce the country’s outstanding debts and pave the way for a large package of new international loans. But the debt restructuring has left the country in technical default on its bonds, possibly triggering insurance payments to bond holders — a development that some analysts worry could stigmatize the euro region for years.