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ECB offers banks three-year loans for the first time Huge demand for ECB's three-year loans
(40 minutes later)
The European Central Bank is offering three-year loans to banks for the first time in an attempt to shore up investor confidence in the eurozone. Eurozone banks have rushed to take out cheap three-year loans offered by the European Central Bank, borrowing 489bn euro ($643bn; £375bn).
The central bank hopes to sell up to 450bn euros ($590bn; £375bn) of loans. The central bank had expected to lend up to 450bn euro to stop another credit crunch crippling the banking system.
When the plan was announced, French President Nicholas Sarkozy said that the banks could use the money to invest in eurozone sovereign debt. When the plan was announced, French President Nicholas Sarkozy said that banks could use the money to invest in eurozone sovereign debt.
However, analysts are not sure if banks will go on to use the money in this way. However, analysts are not sure if banks will use the money in this way.
Some suggest the money will be used to boost bank balance sheets, especially since the ECB lowered its collateral requirements when it announced the loans, enabling weaker banks to apply for the funds.Some suggest the money will be used to boost bank balance sheets, especially since the ECB lowered its collateral requirements when it announced the loans, enabling weaker banks to apply for the funds.
"A cash for trash mechanism allowing banks to access cheap funds and buy up more sovereign debt - or more likely just shore up their own finances," said Justin Urquhart Stewart of Seven Investment Management."A cash for trash mechanism allowing banks to access cheap funds and buy up more sovereign debt - or more likely just shore up their own finances," said Justin Urquhart Stewart of Seven Investment Management.
Carsten Brzeski, economist at ING, said: "The good news is that banks won't have to worry about liquidity for three years and that it has already pushed down government yields as banks are buying them to use as collateral.Carsten Brzeski, economist at ING, said: "The good news is that banks won't have to worry about liquidity for three years and that it has already pushed down government yields as banks are buying them to use as collateral.
"However, whether the ECB's hopes that the money will filter through to the real economy will be fulfilled remains to be seen.""However, whether the ECB's hopes that the money will filter through to the real economy will be fulfilled remains to be seen."
There are hopes that the banks taking the loans from the ECB at low interest rates will then buy sovereign bonds from countries such as Italy and Spain which offer a much higher yield.There are hopes that the banks taking the loans from the ECB at low interest rates will then buy sovereign bonds from countries such as Italy and Spain which offer a much higher yield.
In a sign of the market's interest in the offer, demand for ECB one-week refinancing halved as investors waited to take advantage of the issue.In a sign of the market's interest in the offer, demand for ECB one-week refinancing halved as investors waited to take advantage of the issue.