Over 500 European banks rushed to borrow almost half a trillion euro in cheap loans from the ECB on Wednesday (21 December), highlighting the credit squeeze on the market and only marginally increasing investor confidence that the central bank is mastering the euro-crisis.
The price in gold dropped slightly on Thursday morning and markets went up by an average of one percent in response to the cash injection, as 523 banks took a record of €489.2 billion at an interest rate of just one percent over three years - an emergency programme initiated by the European Central Bank.
So far, only short-term loans for up to a year benefited from these low rates. But the ECB decided to extend the period with many European banks heavily exposed to government bonds from troubled eurozone countries. This has led to decreasing inter-bank lending due to lack of trust in each other's capacity to pay back.
The ECB has been fiercely resisting pressure from southern countries and market analysts to step in and buy government debt on a massive scale, insisting that it can do so only to a "limited" degree and that it is there to salvage the financial system, not governments.In a speech on Monday in the European Parliament, ECB chief Mario Draghi warned of a credit crunch if his institution did not intervene to help banks out.
Preventing that from happening was his main task rather than expanding the bond purchasing programme, which was "neither eternal nor infinite." A June 2012 deadline for banks to boost their capital to nine percent risks forcing banks to "fire sell" assets at very low prices and to reduce overall lending even further, Draghi noted.
Euobserver
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