ECB Loans $639 Billion to Hundreds of European Banks

(Newsroom America) -- The European Central Bank loaned euro489 billion ($639 billion) to hundreds of banks for three years, an unusually large amount of time, in an attempt to bolster a crumbling financial system that has been weakened by mounting government debt.

The loans to some 523 banks were the largest infusion of credit into the financial and banking system of the eurozone in the 13-year history of its currency. The current bailout was larger than the euro442 billion ($578 billion) in one-year loans made in June 2009 when the system was faltering following the collapse of U.S. investment bank Lehman Bros.

The purpose of the ECB loans is to ensure that banks have enough cash to lend to businesses, analysts said, adding a credit crunch could wind up worsening the debt crisis by cutting off growth needed to build, then sustain, a recovery.

The markets initially responded positively to the massive new loan, but retreated on the realization that the amount only served to accentuate the zone's debt problems.

The loans will help stabilize the banking system but they don't do anything to resolve the structural government debt problems that exist in a growing number of European nations, many of which are struggling to pass austerity measures aimed at cutting expenditures.

The amount the ECB loaned was larger than many analysts had expected but likely because of the need.

"It was obviously an offer the banks could not refuse," Laurent Fransolet, head of fixed-income strategy at Barclays Capital in London, told Bloomberg News. "It shows the ECB is not out of ammunition and it gives banks security on liquidity for a few years. On the other hand it means banks will rely on the ECB for longer."

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