The take-up by the eurozone banks of €489bn from the European Central Bank (ECB) ought to be good news as a sign that the ECB is now at last, having refused to do so in 2011, ensuring eurozone banks can fund themselves adequately next year. The ECB believes they will need €720bn of loans in the first quarter of 2012.
Previously this money would have come from outside investors, but in current circumstances where the fear has been that a big European bank might collapse any time, any roll-over of funds by international investors seems very unlikely. So in principle the ECB initiative should have been applauded. In practice however the fact that the take-up was twice that expected probably indicates the reverse: that the pressures in eurozone banking are even worse than previously thought.
The big question now is how it will be used. Previously these loans were always meant to be on-lent to households, property developers and City traders. This time round not much will probably go to businesses or households in promoting growth since, as with the £200bn of quantitative easing issued in the UK, the banks will likely hoard the cash to ease their liquidity positions.
Maybe the eurozone banks will seize the opportunity to use 1% 3-year loans to buy government bonds with a 6% yield or more. Indeed, since the governments of all the stricken eurozone countries – Italy, Spain, Portugal, Greece and Ireland – cannot raise their own funds on the open market, that is exactly what they are being encouraged to do by the likes of Sarkozy. But not only is that doubtfully within the ECB’s mandate, it would also be dangerous if the sovereign IOUs were in the end downgraded anyway.
The €489bn borrowing will only properly succeed if it is used as short-term bridging finance to enable political leaders to deal with the fundamental underlying problems of the eurozone – the lack of growth and the yawning differentials between its members in competitiveness. That seems fanciful when the fiscal compact at the heart of the summit earlier this month, even if it becomes a reality which is extremely uncertain, is widely seen not as an engine for growth, but rather a recipe for continent-wide deflation.