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European Central Bank Pumps €529Bn Into Financial System With Cheap Loans

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The European Central Bank has pumped billions into its faltering financial system by loaning €529bn to banks.

It said that at least 800 banks had put in bids for the loans.

Lenders took €489bn from the ECB in the first round of Long Term Refinancing Operation loans offered in December. That round was widely seen as having boosted bonds and lifting markets.

The second round of loans announced on Wednesday was slightly lower than estimated by some analysts, but should still buy more time for politicians to find a longer-term solution for the sovereign debt crisis.

Martin van Vliet of ING said that the announced loans were "a Goldilocks outcome", according to the Guardian.

He said they were "not overly large as to generate concern about the fragility of the European banking system, but high enough to pre-fund a substantial share of maturing bank debt and spark more buying of Italian and Spanish paper".

The BBC quoted Luca Cazzulani of Unicredit, who said: "This will increase the level of excess liquidity pretty sharply, which is ultimately positive or very positive for risk trades.

Bank of England governor Sir Mervyn King said the scheme helped avoid a run on the region's banks.

But he dismissed questions at a Treasury Select Committee meeting that the scheme could be used in the UK to encourage banks to lend more to small and medium enterprises (SMEs).

He said: "It has provided to banks, particularly in the southern area, which were experiencing a banking run.

"That money was flowing to banks in the northern area and the prospect of a run has been removed because of it.

"But the UK banking system is not short of liquidity - if anything it needs more capital. The idea that the LTRO has eased SME funding is a myth."

The scheme has also helped to buy banks some time to repair their balance sheets and ECB president Mario Draghi hailed the first round of funding as having averted a "major, major credit crunch".

Meanwhile, Labour MP George Mudie asked representatives of the Bank of England why they have not done more to boost funding to SMEs, with many struggling to stay afloat as banks cut lending.

But Sir Mervyn said the Bank does not have the power to lend to small businesses and said only the Government can put taxpayers' money at risk.

He told MPs: "If we were to do that and lose money, this committee would be the first group to say: 'Under what authority did you lose taxpayers money?'"

Banking stocks rose in trading after the announcement, while gold prices were also expected to rise on the news.

Bloomberg quoted analysts anticipating eurozone stocks could double in value in 2012 with sufficient support from the ECB.

However the eurozone received fresh bad news on Wednesday after Slovenia became the latest member nation to fall into recession.

The country said its economy shrank by 2.8% year-on-year over the last three months of 2011.

The Swedish economy also retracted in the last three months, its government said, while Germany reported its unemployment rate had risen.

There were also expectations of further protests in Greece after new austerity measures were approved on Tuesday.

Around the Web

Gold edges up ahead of ECB loan offer | Reuters

Shares gain, euro flat ahead of ECB loan tender | Reuters

Lending Remains Tight as ECB Readies Loans - WSJ.com