ECB offers banks 3 year loans for the first time

The European Central Bank is offering three-year loans to banks for the first time in an attempt to shore up investor confidence in the eurozone. The central bank hopes to sell up to 450bn euros ($590bn; £375bn) of loans. When the plan was announced, French President Nicholas Sarkozy said that the banks could use the money to invest in eurozone sovereign debt. However, analysts are not sure if banks will go on to use the money in this way. Some suggest the money will be used to boost bank balance sheets, especially since the ECB lowered its collateral requirements when it announced the loans, enabling weaker banks to apply for the funds. "A cash for trash mechanism allowing banks to access cheap funds and buy up more sovereign debt - or more likely just shore up their own finances," said Justin Urquhart Stewart of Seven Investment Management. Carsten Brzeski, economist at ING, said: "The good news is that banks won't have to worry about liquidity for three years and that it has already pushed down government yields as banks are buying them to use as collateral. "However, whether the ECB's hopes that the money will filter through to the real economy will be fulfilled remains to be seen." There are hopes that the banks taking the loans from the ECB at low interest rates will then buy sovereign bonds from countries such as Italy and Spain which offer a much higher yield. In a sign of the market's interest in the offer, demand for ECB one-week refinancing halved as investors waited to take advantage of the issue.