ECB Lends Banks €489 Billion in First Day of 3-Year Loan Offering

The European Central Bank awarded 489 billion euros in three-year loans today, the most ever in a single operation, signaling that banks foresee other sources of funding remaining tight through 2012.

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The ECB said 523 banks asked for the 489 billion euros in funds, which will be lent at the average of its benchmark interest rate — currently 1 percent — over the 1,134-day loan period.

Institutions have become wary of lending to each other as Europe’s debt crisis drags on, risking government and bank defaults. The ECB’s loan program is meant to ensure that banks have access to cheap cash for the medium term so that they can keep lending to companies and households. The ECB has also widened the pool of collateral banks can use to secure the funds.

Barclays estimates that today’s operation will inject 193 billion euros of new money into the system, with 296 billion euros accounted for by maturing loans. The ECB aalso lent banks 29.7 billion euros for 98 days, and $33 billion for 14 days in a regular dollar offering, up from $5.1 billion a week ago.

What banks will do with the loans remains to be seen, but French President Nicolas Sarkozy suggests they use the loans to buy even more government debt.

The loans amount to quantitative easing “through the backdoor,” said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. “What the ECB is doing is providing ultra-cheap money to banks, which in turn are going to be in there buying the sovereign debt up,” Derrick told Bloomberg Television’s “First Look” earlier today.

“That’s good news in the sense that it’s clearly going to help sovereigns in the near future, but it’s also printing more money,” said Derrick. “That’s going to start to weigh on the euro over time.”

However, Martin van Vliet, an economist at ING Group in Amsterdam, said banks are more likely to use the loans to “finance credit to the private sector or to repay maturing bank debt.”

“We doubt whether the money will be used extensively to fund purchases of peripheral debt,” he said.

Some 230 billion euros of banks bonds will mature in the first quarter of 2012, ECB President Mario Draghi told the European Parliament this week.

“Banks represent about 80 percent of lending to the euro area,” Draghi said. “The banking channel is crucial to the supply of credit.” He predicted banks will continue to experience “very significant funding constraints” throughout 2012.

A Bank of England study shows that banks from the 17-nation euro zone need to refinance 35 percent more debt next year than they did this year. Lenders have more than 600 billion euros of debt maturing in 2012, according to the study, and around three quarters of that is unsecured.

Today’s lending exceeded the 442 billion euros awarded in the ECB’s inaugural 12-month loan in 2009. The ECB said 123 banks shifted a total of 45.7 billion euros into three-year loans from an existing one-year facility allotted in October. The ECB will offer a second three-year loan on February 28.

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