Analysis: ECB cash to give indirect boost via banks

Thu Dec 22, 2011 3:14pm EST
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By Natsuko Waki and Steve Slater

LONDON (Reuters) - The European Central Bank's offer of cheap long-term cash is an attempt to prevent a rapid bank deleveraging shock rather than U.S.-style money printing that will filter through to the real economy and leach into other markets.

Italian and Spanish government bonds may benefit a little from newly flush banks buying them. But the money is most likely to be used to help ease banks' immediate refunding needs - they need to sell up to 3 trillion euros of assets to deleverage and meet strict new regulatory capital requirements.

On the other hand, the fact that a credit crunch has been averted and deleveraging can now happen more smoothly removes twin potential threats to Europe's struggling economy.

And the ECB's three-year ultra-cheap loans may ease a wave of capital outflows by U.S. money market funds from European banks, which has gummed up interbank lending.

The borrowing of 490 billion euros by over 500 banks - the largest ever amount of liquidity pumped into the financial system - represents nearly two thirds of all the European bank bonds maturing in 2012. It is almost 1-1/2 times the 2012 combined sovereign bond issuance of Spain and Italy.

The ECB will follow up with another similar operation in February in a move designed to directly help banks which need to raise capital.

But it is very different to the quantitative easing (QE) by the Federal Reserve which bought more than $2 trillion of Treasuries and other securities with new money to kick-start the U.S. economy in 2008-2010.

"Genuine QE creates money and buy assets, so there's direct intervention in the financial market. What the ECB is doing is making liquidity available to banks against collateral. For some people that may give an empty feeling as it's not the bazooka they were hoping for," said William de Vijlder, chief investment officer at BNP Paribas Investment Partners.   Continued...