Strategic Briefing | 12.22.2011 | The ECB Lends After All

ECB unleashes a wall of money
Financial Times | Dec 21
If the answer to the eurozone crisis was a “wall of money”, it was provided on Wednesday by the European Central Bank. More than 500 banks borrowed a total of €489bn in three-year loans – equivalent to about 5 per cent of eurozone gross domestic product and the largest amount provided in a single ECB liquidity operation.
A Central Bank Doing What It Should
NY Times | Dec 22
After long resisting the kind of financial force Washington used at the height of the financial crisis in 2008, European central bankers on Wednesday pumped nearly $640 billion into the Continent’s banking system. The move raised hopes that the money could alleviate the region’s credit squeeze.

Good start from Draghi — but much more to do
Irish Independent News | Dec 22
The good news is that European banks were able to borrow much more than anyone had expected from the ECB yesterday. They borrowed a total of €489bn of cheap three-year funding from the ECB as against the €300bn that had been widely predicted. The bad news is that European banks are probably in even worse shape than most observers had suspected.
ECB lends banks $639 billion over 3 years
AP Business | Dec 21
Struggling banks snapped up €489 billion ($639 billion) in cheap loans from the European Central Bank on Wednesday, a sign of just how hard or expensive it has become to borrow from each other. The huge demand for newly available three-year loans comes as fears rise that heavily indebted European governments could default and force banks and other bond holders to take big losses… “The good news is, the ECB’s efforts to increase liquidity are working,” said Jennifer Lee, an analyst at BMO Capital Markets. “The bad news is, high demand for the loans creates worries that banks are urgently in need of funds to boost liquidity.”
European stocks gain as bank funding pressure eases
Reuters | Dec 22
The European Central Bank, in its first-ever three-year tender, lent 523 banks a record 489 billion euros ($638 billion) at low interest rates on Wednesday, well above the 310 billion euro take-up forecast. The scale of the funding operation initially exacerbated concerns about the health of the financial system but was increasingly being seen has having eased pressures on the banks, though concerns remain that it offers no fundamental fix for the debt problems facing the euro zone. “In the longer-term the liquidity provided yesterday is not going to solve the debt crisis, it is not going to help southern European countries with their problems in getting control of their public debt,” said Niels Christensen, FX strategist at Nordea.
How Bad Ideas Worsen Europe’s Debt Meltdown
John Cochrane (Bloomberg) | Dec 21
Conventional wisdom says that sovereign defaults mean the end of the euro: If Greece defaults it has to leave the single currency; German taxpayers have to bail out southern governments to save the union. This is nonsense. U.S. states and local governments have defaulted on dollar debts, just as companies default. A currency is simply a unit of value, as meters are units of length. If the Greeks had skimped on the olive oil in a liter bottle, that wouldn’t threaten the metric system. Bailouts are the real threat to the euro. The European Central Bank has been buying Greek, Italian, Portuguese and Spanish debt. It has been lending money to banks that, in turn, buy the debt. There is strong pressure for the ECB to buy or guarantee more. When the debt finally defaults, either the rest of Europe will have to raise trillions of euros in fresh taxes to replenish the central bank, or the euro will inflate away.
Eurozone zombies follow Mario Draghi’s cheap money
The Telegraph (Britain) | Dec 21
Far from reassuring markets, the scale of Wednesday’s bail-out for eurozone banks by Draghi’s European Central Bank (ECB) should simply confirm worst fears. European banks face a €600bn tsunami of debt coming due in 2012 (mostly in the first quarter) and many simply can’t pay up because the usual source of refinancing, wholesale money markets, are refusing to lend them any more. Sound familiar?
‘The Euro-Zone Bailout Programs Must Be Stopped’
Der Spiegel | Dec 20
How to save the euro? Some believe that the European Central Bank is the key to any solution. Others think that the euro zone should be contracted and the weak members squeezed out. Spiegel spoke with two leading German economists about the currency’s future. Their one area of agreement? Something must be done quickly.
Spiegel: Mr. Starbatty, Mr. Bofinger, can the euro still be saved?
Starbatty: All of the measures that are currently planned take effect in the long term. But rescue measures are needed now. That’s why many politicians want to pull out the so-called bazooka and inject money into the market through the European Central Bank (ECB) or introduce euro bonds. Both are deadly sins. It would be better to shrink the monetary union to a hard core that can sustain the euro.
Bofinger: That would be a disaster. But I agree with you that time is of the essence. The highly indebted countries must be able to borrow at moderate interest rates so they don’t go bankrupt. This could be achieved with euro bonds. And if they can’t be implemented that quickly, the ECB has to stabilize the system. In doing so, it would not create inflation but would in fact avoid deflation.