Institutions most likely to sit on cheap money
THERE is good news and bad news from the European Central Bank's first-ever offer of three-year loans yesterday.
The good news is that injecting the guts of €490bn into Europe's faltering banking system must grease the wheels of commerce for some time and must also delay or even prevent a European banking crash.
The bad news is that banks needed so much money in the first place. The markets initially rallied but later retreated as the sheer magnitude of the lending requirement began to sink in.
We don't know who took up the loans yet but the chances are that the figures issued in the coming weeks will reveal that most of the borrowing was concentrated on countries that are in trouble. Even before this allotment, we already knew that French banks have almost quadrupled their intake of ECB money since June to €150bn, while banks in Italy and Spain are each taking more than €100bn.
Much of the money will replace other borrowings from the ECB, leading analysts to calculate that the real amount of extra cash sloshing around the system will be close to €200bn.
The allotment is likely to be of significant help to Irish banks as the new money could be more than 3 percentage points cheaper than they can get on the open market.
As part of the deal, they were also able to convert one-year loans they took from the ECB in October into the new three-year loans and also will be able to pay it back after just a year if they so wish.
Even the ECB's critics admit that the central bank is trying. Yesterday's lending came just a few weeks after a co-ordinated central bank action on dollar swaps, but critics believe the ECB is still addressing the symptoms rather than the cause of the current debt crisis.
Yesterday was not the famous 'big bazooka' which the markets childishly crave, but it lets the ECB continue to obey its mandate, which allows it to bail out banks but not countries.
Yesterday's actions won't ease the sovereign debt crisis because there is no way that the banks will use the funds to purchase large volumes of peripheral government bonds.
We have seen here in Ireland what happens when you give banks large amounts of cash in a crisis; they sit on it. Something similar is likely to happen in this case.