The European Central Bank (ECB) announced on Wednesday morning that they will make 489 billion of cheap euros available to 523 European Union banks with the expectation that these banks will purchase bond purchases of high yielding sovereign debt in the euro zone.
The 489 billion euro amount for funding was higher than economists had expected and demonstrates that European banks are facing considerable financial pressure.
The ECB has 2.5 trillion in reserves. A 489 billion cash infusion to EU banks represents a 20% reduction of their reserves, according to a figure quoted by Bloomberg’s Linda Yueh.
On December 8th the ECB announced new liquidity measures to provide monetary assistance across the euro zone for establishing a better monetary environment that helps to thaw out the frozen credit market in the euro zone.
As a result of the recent 50 % write down that banks were asked to take with Greek bonds during the recent Greek refinancing bailout package in addition to other large bond holdings in other Euro zone countries, European banks have shown reluctance to loan euros throughout the Euro zone, making it difficult for growth to occur.
After the decision in early December by the European Banking Authority to increase capital requirements for European banks by 114.7 billions, there are rising concerns that EU banks won’t be able to attain their growing capitalization demands.
The ECB’s new liquidity measures, which was first announced on December 8th, includes a plan consisting of 3 year financing to EU banks at an interest rates of 1% (recently lowered) with softer collateral requirements.
Many economists are already referring to the ECB’s new liquidity infusion as “quantitative easing by the backdoor.” Because the ECB continues to oppose purchasing large amounts of sovereign debts through new bond purchases to help lower bond yields and calm the global markets, they have faced some criticism.
The ECB’s new inclination to provide financial assistance to Europe’s banks, which finances over 80% of everything in Europe, a figure quoted today by Bloomberg’s Linda Yueh, demonstrates that they are not sitting on their hands either.
Today’s new liquidity infusion, known as the LTRO (Long Term Refinancing Operation), should help to assure markets that the ECB is taking some type of action to help contain Europe’s debt crisis from spreading throughout the euro zone.
Europe has a growing appetite for more capital to address their maturing debts. Italy and Spain have 146 billion euros in maturing debt in 1 Q 2012. Overall, there are 230 billion euros maturing in 1 Q 2012. Rising bond yields have been hurting the value of holdings by European banks.
The new ECB liquidity boost has the potential to lower volatility with the bond yields of sovereign debt and also calm the stock markets. In the long term, growth is desperately needed in Europe, especially in southern euro zone regions where debt ratios are high and a fresh wave of austerity measures is about to unfold. Paying off long term sovereign debt won’t occur unless their is real growth.
Italy’s new third quarter GDP number shows contraction by 0.2% . France’s latest quarterly GDP number also showed contraction. Recession is expected in many countries in the Euro zone, with the exception of Germany, during the first half of 2012.
United States Federal Treasury Pushes For Risk Management
U.S. banks will be required to reduce their financial bonds to one another under new proposed rules aimed at preventing the collapse of one big institution from causing a larger crisis.
I hope to write more about this topic during my next post.