European banks continue to struggle leading to a new series of bailout measures. The European Central Bank loaned out $639 billion or 489 billion Euros, in cheap loans to many struggling banks around the continent. The cheap loans will be lent out over 3 year periods.
ECB Lends Banks $639 Billion
With such discounted loans, the demand for them will be at such a high level that it is expected too many banks will request the loan. Stabilizing the banks is an important task, but with the European nations already being heavily indebted, they could face default and other bond holders face large losses.
This latest round of loans will follow the past efforts that obviously have not been enough for the European banks to survive on their own in the current European economic environment. This round of loans to 523 banks overpasses the 2009 extension of one year loans that cost $578 billion.
The series of loans have taken its toll on the European Central Bank, with them being the largest infusion of credit into European banks in its short thirteen year history since the Euro was established.
Without these loans by the European Central Bank the European banks would have had to cut back on loans to European businesses, putting the continent’s economy in an assumed harder situation. They are hoping the banks will use these loans to help refinance or pay off $300 billion in existing loans.
The European economic and banking crisis came from European governments spending money, including cheap loans, at a rate of borrowing money to finance the spending that could not be maintained. The European Central Bank President, Mario Draghi, have said that to get out of this economic situation the European Central Bank should be considered a bank of last resort for loans and should instead focus on buying back bonds to lower borrowing costs. Despite this loans have been a policy for years and this latest round is the largest series of loans yet.
The loans were initially expected to be $392 billion, but instead far exceeded that at $639 billion. On the news of this bailout, the Euro fell along with the European markets.Some believe the loans are increasing liquidity, which after all led to the problem to begin with, but the banks will need large amounts of money to supply the high demand.
Despite all these efforts, the Eurozone may still be heading towards a recession. Italy posted a -.2% GDP on Wednesday. Being the third largest economy in the Eurozone, it suggests the other nations may be facing similar reports this upcoming year.
While in the business of bailing out loans, President Mario Draghi have stated that the European Central Bank is not in the business of bailing out entire countries, despite some efforts that have been perceived as attempting to do so. He instead suggests that the nations must simply reduce their budgets and deficits.
In addition to these loans, the European Central Bank has been cutting the interest rates leading to lower interest payments, but of course having ramifications for investors in the private market.