The European Central Bank (ECB) has been overwhelmed by the rush for cheap three-year loans. The demand for these loans has far exceeded expectations — a fact that underscores the difficult times the banking system is going through.
A system whose raw material is money has been facing severe liquidity constraints in the wake of the crisis in Europe. Given the scale of the crisis and debts maturing in 2012, the system could well do with a few more liquidity shots of this nature.
According to the BBC, ECB advanced around 490 billion euro as opposed to 450 billion euro it had hoped would go off the counters. In its December Bulletin, the ECB had proposed a non-standard monetary measure of extending a 36-month refinancing line to euro-area banks in an attempt to ease liquidity tensions.
Although, a stop-gap, the step provides a comfortable enough lifeline for banks to shore up their balance sheets and manage asset-liability mismatches. The inexpensive nature of the loans will help banks address their interest rate mismatches.
Some have suggested that these funds be used to buy sovereign debt. But that would be investing good money after bad – a situation that helped bring about the crisis in the first place.
Europe appears to have been pushed into action after several red flags. Lead indicators of industrial activity have been falling across the world. The Purchasing Managers’ Index (PMI) for global all-industry output, which averaged 51.8 during September-November 2011, remained below the average for the first half of the year. Ratings agencies such as Standard & Poor’s and Moody’s, a division of Moody’s Corporation (MCO”>MCO) had also sounded the alarm.
Meanwhile, major banks such as HSBC Holdings Plc (HBC”>HBC), UBS AG (UBS), Bank of America (BAC”>BAC), Citigroup (C), JP Morgan (JPM”>JPM), Wells Fargo (WFC”>WFC), Goldman Sachs (GS”>GS), Bank of New York Mellon (BK”>BK) and Morgan Stanley (MS) have also suffered ratings downgrades. Faced with uncertainty and financial tightness, the financial services sector has announced large scale retrenchments to cut costs.
ECB’s step comes as a big shot in the arm for the banking sector. We have been witness to coordinated action in the recent past on the part of central banks across the world to bolster liquidity in the system and help push global recovery. The world shares Europe’s anguish!
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