Wednesday, December 21, 2011

ECB's rescue of eurozone banks is temporary

by Robert Peston

BBC News

December 21, 2011

When banks can't borrow, they can't lend.

A general problem of that sort is a credit crunch, in which businesses and households can't obtain the credit they need.

That, in turn, leads to an economic slowdown or even a recession.

And in the worst case, banks that can't borrow go bust because they're unable to repay their own debts as they fall due.

That's why today's offer of three-year loans to the eurozone's banks by the European Central Bank matters, because it reduces some of the risk that there will be an unfortunate accident for a big eurozone bank in the coming 12 months, as eurozone banks have to repay some 700bn euros ($920bn; £580bn) of maturing debt over that period.

The background to all this, as you know, is that eurozone banks in general have been finding it harder and more expensive to borrow euros in recent weeks and almost impossible to borrow dollars, because US money market managers, who control the world's biggest pools of dollars, have decided there are safer places to keep their cash.

The consequence has been that the European Central Bank and central banks in eurozone countries have played a much more important role in lending to commercial banks.


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