Banks gorge on ECB loans, market cheer short-lived

Euro coins are seen in this photo illustration taken in Rome, December 9, 2011.

Credit: Reuters/Tony Gentile

FRANKFURT | Wed Dec 21, 2011 1:35pm EST

(Reuters) - Banks gobbled up nearly 490 billion euros in three-year cut-price loans from the European Central Bank on Wednesday, easing immediate fears of a credit crunch but leaving unresolved how much will flow to needy euro zone economies.
Following a string of failed attempts by euro zone leaders to thwart market attacks on the bloc's weaker members, hopes of crisis relief before the year-end had been pinned on a massive uptake of the ECB's ultra-long and ultra-cheap loans.
The near half a trillion euro take-up of ECB funds represented the most the bank has ever pumped into the financial system and exceeded almost all forecasts. A total of 523 banks borrowed with demand way above the 310 billion euros expected by traders polled by Reuters,
"The take-up was massive ... much higher than the expected 300 billion euros. Liquidity on the banking system has now increased considerably," said Annalisa Piazza at Newedge Strategy.
The funding should bolster banks' finances, ease the threat of a credit crunch and may tempt them to buy Italian and Spanish bonds, thereby easing the currency area's sovereign debt crisis.