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BBC World Service

Banks take advantage of ECB lending

Mark Gregory Dec 21, 2011

Jeremy Hobson: The European version of the Federal Reserve this morning offered banks as much money as they wanted — cheap money — due back in three years. The expecation was that banks would borrow about 310 billion euros. But the more than 500 banks that took part borrowed about 500 billion euros — or about $640 billion.

The BBC’s business correspondent Mark Gregory is with us from London with the latest. Good morning.

Mark Gregory: Good morning.

Hobson: What does the strong demand — the stronger than expected demand — for these bank loans tell you?

Gregory: You’ve got to remember the reasons why the ECB is making these loans, and that’s to avoid the risk of a credit crunch — a situation in which European banks are so starved of money, they don’t have the funds needed to make routine loans to consumers and businesses. The fact that so many banks have taken advantage of this help from the ECB means that there will be a lot more money in the system, which means that the fears of a credit crunch are are eased a lot.

That’s the good thing. The bad thing, though, of course, is the fact that so many banks need this special help is a sign of just how serious the problems they face really are. Effectively, the normal ways they raise money, they can’t do it, so they need help from the European Central Bank.

Hobson: And that help is coming and is available, it sounds like, to an unlimited degree, how is the European Central Bank in the position to say: take as much money as you want?

Gregory: Well, monetary authorities in the end can always do what they like over the short-term. The problem only comes if the scheme doesn’t work, some of the banks go bust, and they don’t repay their loans to the European Central Bank. That’s some way down the track. In the meantime, it’s much more of a problem, if you like, the threat of a credit crunch in Europe; the threats of the sovereign debt crisis. And the immediate emergency is more important than the threat over a longer term that the ECB might not get repaid.

Hobson: Mark Gregory from the business desk at the BBC in London. Mark, thanks a lot.

Gregory: And thank you very much indeed.

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