European banks borrow 530 billion euros from European Central Bank; euro declines, dollar climbs

02/29/2012 1:14 pm EST


Jim Jubak

Founder and Editor,

More money. More banks.

European banks signed up to borrow 530 billion euros ($712 billion) from the European Central Bank, the bank announced today, in the central bank’s new offering of 3-year loans. That’s up from the record 489 billion euros banks borrowed in December in the central bank’s first offering of three-year money.

The number of banks participating soared to 800 in this offering from 523 in December. That’s a result of more small banks deciding that they would participate in this round.

The increase to 530 billion euros was above the 470 billion euros projected by economists surveyed by Bloomberg. But it was well below estimates earlier this month that borrowing could surge to as much as $1 trillion euros. The Wall Street consensus in recent days has been that anything less than 500 billion euros would be a disappointment resulting from banks’ reluctance to take on the “stigma” of needing the cash. Left to weigh “stigma” versus cash, European banks took the money offered at 1%.

The rise in the number of small banks participating, speculation goes this morning, could mean that more of this round of borrowing could actually wind up as loans in the real economy. In December the bigger banks that participated in that round immediately parked most of their receipts back with the European Central Bank and only gradually have they used the proceeds, as the central bank had hoped, to buy sovereign debt from Spain, Italy, and other stressed EuroZone countries. In January, according to figures from the European Central Bank, Spanish banks increased their holdings of Spanish government debt by 23 billion euros and Italian banks bought 21 billion euros in Italian government debt.

This time, the thinking goes, smaller banks are less likely to spend their cash buying government debt and more likely to use it to make corporate loans. That may be just wishful thinking but if smaller banks behaved like that it would help with the credit crunch in Italy and Spain that has helped stall those economies.

After the announcement the euro fell to $1.3452 the euro fell after the ECB announcement to $1.3452 from $1.3471. That’s not surprising since the European Central Bank has now added 1 trillion in three-year loans to its balance sheet. The central bank’s balance sheet now stands at a record 2.74 trillion euros. (And it’s not surprising that the dollar has rallied today after this announcement.)

Central bank officials say there is no plan for a third three-year offering.
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