European Debt Crisis

European Central Bank bails out Europe’s banks

Heidi Moore Dec 21, 2011

Kai Ryssdal: Christmas came early for more than 500 European banks today. It could easily have been a lump of coal, but the European Central Bank — their version of the Fed — tied $640 billion up in a nice little bow for ’em. The loan package gives banks a lifeline to get through the next three years, assuming they can make it that far.

Our New York bureau chief Heidi Moore reports.

Heidi Moore: European banks got a big bailout today. The European Central Bank let them borrow billions of dollars for three years at only 1 percent interest.

Sweet deal, right? No wonder more than 500 banks took it. But wait.

Rebecca Patterson: Is it good news, or is it scary that so many banks need it?

That’s Rebecca Patterson, the chief market strategist for JP Morgan Asset Management. She pointed out that banks usually like to avoid the stigma of taking cheap money from the government. But in this case, no one else wants to do business with them.

And if the banks can’t do business, everything stops. We saw that in the U.S. in 2008.

Patterson: So what’s going on with the banks there is important on a lot of levels. If the banks are in trouble, they’re not lending. If they’re not lending, European countries have a hard time growing. If they can’t grow, European countries have a deeper recession.

There’s another catch. The ECB wants the banks to use those cheap loans to buy government bonds. Yes, the same ones causing the crisis. So a lot of banks said: no thanks. We’re good.

Steen Jakobsen: Last time we had this program, there were about 1100 banks participating. Now we’re down to 550.

That’s Steen Jakobsen, the chief investment officer for Saxo Bank. He explained:

Jakobsen: A lot of banks don’t feel that buying more of the toxic government bonds will do any good for them.

The reason is simple.

Jakobsen: I think all of them, it’s a Catch-22 situation. Because if you think you can solve debt by creating more debt, maybe I need to go back to my business school.

There’s another reason to be wary, Jakobsen says: Trying to save Europe by saving its banks hasn’t been working for the past three years.

In New York, I’m Heidi Moore for Marketplace.

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