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The European Central Bank injects €442 billion into banking system

The European Central Bank (ECB) allotted €442 billion to banks for 12 months, the biggest amount it has ever given in a single auction. The amount was more than most economists had expected.

The decision is the latest in ECB's efforts to maintain proper functioning of the financial market amid global crisis. Loans would be given at a record low fixed rate of 1%, which is the benchmark interest rate for Eurozone. Allotment to 1,121 banks, who took part in the auction will begin tomorrow. The maturity date is July 1, 2010.

The new allotment is higher than the previous record allotment of EUR 348.6 billion in December 2007, when the financial crisis intensified.

In May, the ECB had announced that it would double the maximum maturity on its loans to a year from 6 months previously. Today's is the first of the three auctions planned for this year, with the other two are due on September 29 and December 15.

The first-ever 12-month allocation resulted in a fall in demand for three-month funds. The ECB allocated only EUR6.4 billion in three-month funds, which will replace the EUR28.8 billion expiring this week.

The financial crisis has hit Europe's banking system severely. The domino effect was seen in all sectors of the economy. Troubles in credit availability squeezed businesses and this led to reductions is staff, production and investment.

To ease tensions in the financial system and to ensure smooth flow of funds, the ECB has cut its key interest rate to a record low of 1%. Since October last year, the bank had reduced the key interest rate by a total of 325 basis points. In addition, from next month onwards, the ECB will start buying EUR 60 billion in covered bonds.

The new liquidity injection by the ECB came on the heels of calls for mopping up excess liquidity when the appropriate time comes. Tuesday, ECB Executive Board member Christian Noyer said the bank must be ready to absorb excess liquidity as soon as necessary. Another ECB rate-setter, Germany's Axel Weber said there is no need of additional stimulus now. But, the bank's President Jean-Claude Trichet warned that there are still risks of a sudden emergence of unexpected financial turbulence.

Secretary-General of the Paris-based Organization for Economic Co-operation and Development, Angel Gurria said Wednesday that it is critical to consider exit strategies now in order to prevent new risks in the years ahead.

The think-tank finds no clear visible signs of recovery in the euro area. Euro area GDP is expected to contract 4.8% this year and to show nil growth in 2010. The previous projections were for a 4.1% fall in 2009 and a 0.3% fall in 2010. As increasing unemployment impair consumer spending, the eventual recovery is likely to be slow.

Source: RTTNews
Date: 25.06.2009 [227]

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