Banking, finance, and taxes

Eurozone Banks Borrow Half a Trillion

The European Central Bank this morning got its long-term refinancing operation (LTRO) off the blocks with a bang. Eurozone banks took €489 billion ($641 billion) of the 1%, three-year loans, surpassing even the highest estimates of around €310 billion.

The program was put in place to help Eurozone banks meet €720 billion of debt coming due in 2012. The idea is banks to take the cheap money and lend it out at reasonable rates to keep credit flowing through the Eurozone — something like a quantitative easing program similar to the US Federal Reserve’s. The proceeds could also be used to strengthen the banks’ balance sheets or go toward easing the debt burden of the peripheral Eurozone nations like Greece, Ireland, Italy, Portugal, and Spain.

Banks being banks, though, an equally likely scenario is that they will use at least some of the funds to buy more of the Eurozone countries’ sovereign debt. It’s the classic ‘carry trade’ and a nearly guaranteed winner. Borrow at 1%, buy Italian sovereign debt at, say, 6%, figuring that at the end of three years something else will come along to save the bank from the risky Italian bonds.

One thing is for sure, though. The better-than-expected uptake on the loans is likely to light a fire under equity markets in Europe today as concerns about liquidity recede into the background.

Paul Ausick

Find a Qualified Financial Advisor (Sponsor)

Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to 3 fiduciary financial advisors in your area in 5 minutes. Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests. If you’re ready to be matched with local advisors that can help you achieve your financial goals, get started now.

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.