Europe's banks get 530B euro injection

The European Central Bank injected more cash into the regions banking system Wednesday, doling out529.5 billion ($704 billion Cdn) in low-interest loans.

It was the second round in a massive credit infusion known as the LTRO, or Long-Term Refinancing Operation, that has been aimed encouraging lending to businesses and consumers at supporting the market for the bonds of troubled governments. Including the first round in December, the volume of three-year, one per cent loans is now over 1 trillion.

To understand how much that is, it would take an individual spending 1 million eurosa day almost 2,800 years to spend the entire loan volume.

Eight hundred banks and other financial institutions took advantage of todays offering of cheap money, far more than the 523 that picked up cheap cash in the first round.

After markets price in the immediate effects of the increased liquidity in the financial system, that increase in the number of banks taking part might raise questions about whether those institutions are having difficulty raising capital.

The first round of loans helped ease the pressure on hard-pressed governments such as Spain and Italy, allowing them to borrow at below rates that were lower than levels that would reflect the markets view of a high likelihood of default. With so much money looking for investment, the ECB loans inflated demandand prices of those bonds, moving their effective interest rates lower. Bond prices and rates move inversely.

The burst of cash also removed fears that a European bank might collapse because it couldn't pay off bonds or other debt coming due. Following the first credit infusion, bank funding markets that had been frozen began to thaw, as some banks were able to borrow by issuing bonds.

Injectionbuys time for Spain, Italy

Several analysts said the ECB's second credit offer was unlikely to provide much more relief to governments.

"Given that there are no further tenders scheduled and the recent ECB rhetoric has been skewed toward this being the last, we believe the market will return to fundamentals and move away from this liquidity euphoria," analysts at Royal Bank of Scotland wrote in a research note.

High borrowing costs have been a key driver in the eurozone debt crisis.

Greece, Ireland and Portugal all had to turn to other eurozone governments and the International Monetary fund for bailout loans when they could no longer borrow at affordable rates.

The easing of borrowing costs gives the new governments of Spanish Prime Minister Mariano Rajoy and Italian Prime Minister Mario Monti time to push for reforms to their labour markets aimed at making their economies more productive and business friendly. That should increase growth and tax revenues, but the measure will take years to take effect.

While they have steadied markets, the ECB loans have had less effect in stimulating bank lending to the wider economy. Loans to businesses only stabilized in January after a steep fall in December. Central bank officials are watching closely to see if their efforts result in more lending or whether banks just use the money to speculate in financial markets.

Sony Kapoor, managing director of the Re-Define think tank in London, said that "whether they use it to fund a carry trade or to lend more to the real economy will strongly shape what direction the crisis take next."

Jens Weidmann, the head of the conservative Bundesbank, Germany's central bank, has warned that overly generous liquidity could lead to banks investing in riskier assets and that the crisis cannot be solved "solely by throwing money at it."