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European Debt Crisis

Has the ECB action helped avert a banking crisis?

Stephen Beard Dec 22, 2011

Jeremy Hobson: Well in case you missed it, the European Central Bank yesterday printed $640 billion worth of euros and lent them to 523 banks. That’s almost the same amount of money as the TARP program used by the U.S. government during the financial crisis in 2008. But now comes the hard part.

And our European correspondent Stephen Beard is here with us live to explain from London. Good morning, Stephen.

Stephen Beard: Hello Jeremy.

Hobson: So what happens now that the ECB has given out these loans to banks?

Beard: Well, the Central Bank — what it hopes will happen is the credit crunch in Europe will now recede. With so much money sloshing around, the hope is the banks will start lending to each other again, and the danger of a major banking collapse in Europe will be averted for now.

But will this action end the central problem of the eurozone government debt, or sovereign debt? Jacques Cailloux of the Royal Bank of Scotland thinks not.

Jacques Cailloux: It doesn’t really address the core of the problem which is a sovereign problem. Italian bond yields did rise, showing the extent of the problems we’re facing.

The European Central Bank was hoping that the money it lends to the commercial banks will then be used to buy the bonds of the most troubled governments in the eurozone — Italy and Spain for example. And that would bring down those governments’ borrowing costs. But most analysts fear that the banks have already been so badly burned on the eurozone government bonds, they won’t want to buy anymore.

Hobson: And there are obvious risks to the European Central Bank if these banks that were lent to don’t pay them back in the end. How is all of this going down in Europe?

Beard: Generally, it’s been well-received. Stock markets here are up today; a banking collapse has probably been averted as we’ve seen — there probably won’t be a Lehman-style event in the near future. But the eurozone debt crisis — the worries about the possiblity of a government defaulting — sadly, that crisis lumbers on.

Hobson: Marketplace’s Stephen Beard in London. Stephen, thanks.

Beard: OK Jeremy.

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