The FINANCIAL — The European Central Bank is preparing to flood eurozone banks with cheap money again this week in the second of two such operations aimed at preventing a credit crunch in the euro area.
According to eubusiness, in an unprecedented move last December, the ECB announced it would lend as much as banks wanted at an ultra-low interest rate of 1.0 percent for a period of three years so as to keep credit flowing in Europe at a time when banks are increasingly wary of lending to each other in the current debt crisis.
In the end, some 523 banks lined up to borrow a record 489.2 billion euros ($655 billion).
At the time, ECB chief Mario Draghi said that a second such three-year auction of funds — known as a long-term refinancing operation or LTRO — would be held on February 29 and he estimated that demand for the new cash would likely be just as strong.
Draghi, in office only since November, has since been keen to draw attention to the success of the operation.
Tensions in the banking system do indeed appear to have eased, borrowing costs for debt-wracked countries such as Spain and Italy have come down, stock markets across Europe have rallied and confidence is on the rise.
Ever since the eruption of the crisis, the ECB has come under intense political pressure to step in and save eurozone countries sinking under huge mountains of debt.
But the bank has argued from the very beginning that it is up to overspending governments to get their finances in order and restore the markets' confidence in their ability to repay their debts, which is the underlying cause of the eurozone's current ills.
The ECB insists its fire-fighting efforts must be limited to acting as lender of last resort for banks only and not for governments.
Nevertheless, economists and ECB watchers are impressed with Draghi's performance so far, after just four months in office: in addition to a wide range of liquidity measures, the bank has cut interest rates twice, effectively reversing two rate hikes last year.
Nobel-prize winning economist Paul Krugman, writing in the New York Times, was full of praise for Draghi.
John FitzGerald of the Economic and Social Research Institute, a Dublin-based think tank, similarly believed the LTRO has worked "surprisingly well in getting the ECB off the hook.
While Draghi said the aim of the new funding was for banks to lend to households and businesses, there have been concerns that banks are simply hoarding the cash instead, as banks have been parking record amounts of cash in the central bank's overnight storage facility.
Furthermore, in its regular quarterly bank lending survey, the ECB calculated that growth in loans to the private sector slowed substantially in December.