ECB wall of cash averts credit crunch

Mon Feb 27, 2012 6:13am EST
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By Eva Kuehnen

FRANKFURT (Reuters) - The euro zone avoided a credit crunch in January but banks showed scant sign of lending on the funds they snapped up at the European Central Bank's first 3-year lending operation to companies which have been starved of investment funds.

The monthly flow of loans to firms stabilized in January, declining by just 1 billion euros after falling 35 billion euros in December - the fastest drop on record - ECB data showed on Monday.

The flow of loans to households turned positive and the figures showed some of the cash flowed into peripheral euro zone government bonds, which have seen yields fall markedly.

The money supply data had been eagerly awaited as they gave a glimpse of how bank lending activity responded to the ECB's first 3-year funding operation - or LTRO - late last year, which flooded the financial system with 489 billion euros of ultra-cheap cash.

"The positive psychological impact on markets and, particularly, government bond markets has been obvious from the start," ING economist Carsten Brzeski said of the ECB operation.

"The economic impact, however, remains still limited. As a consequence, this week's second 3-year LTRO is clearly not redundant," he said.

ECB President Mario Draghi has said the bank's move avoided a "major, major credit crunch," comments that Monday's data support. The central bank will offer banks the chance to grab another tranche of the ultra-cheap, 3-year money on Wednesday.

The median expectation in a Reuters poll of 60 economists showed that the ECB will allot 492 billion euros ($647.6 billion) at 1 percent. Forecasts ranged from 200 billion to 1 trillion euros.   Continued...