The European Central Bank announced its intentions to lend European banks €489 billion. These loans are an indication that the banks are having a difficult time lending to each other. The ECB is looking to protect banks and other investors from the possibility of a major sovereign default among the PIIGS and other countries in the eurozone.
This is a major precaution as a number of investors are concerned that the sovereign debt crisis is spiraling out of control. This bailout is even larger than the bailout issued to Lehman Brothers in 2008. In fact, it is the largest bailout that has been issued since the euro formed in 1999.
The loans will be issued over a three year period to the 523 banks that applied. ECB vice president Christopher Noyer has suggested that banks use this money to purchase sovereign debt. However, many investors wonder if this is a good idea. One of the reasons the ECB issued the loans in the first place was to protect the banks in case the ECB defaulted on their sovereign debt.
The ECB also suggested that banks use about half of the money to refinance some of their existing loans. This will hopefully prevent banks from having to cut back on loans that the economy is depending on to grow and thrive.
Although the ECB’s actions are attacking one of the key problems in the eurozone, they do not address the core problem facing the region. European countries are facing unsustainable borrowing costs. Although the rates on Italian bonds have dropped below their high of 7 percent, the region is still going to have a difficult time repaying these loans. They will likely face even higher borrowing costs if rating agencies begin to cut ratings throughout the eurozone.
The European Central Bank continues to look for solutions to the massive financial crisis facing the EU. Thus far, they have helped increase liquidity, which may be a good indication of future economic growth. However, they may be limited in their ability to fix the problem facing Europe. The EU is going to need new ways to fix the sovereign debt crisis and fuel GDP growth throughout the region. Addressing both issues simultaneously is likely to be difficult, but will be necessary to fix the concerns facing the region.