Credit freeze melting

The ECB said Wednesday it had lent eurozone banks a little more than 75 billion euros ($110 billion) for one year in an exceptional move aimed at boosting the economy. This was the second time the ECB has offered an unlimited amount of funds for 12 months at its benchmark rate of 1.0 percent.

The amount taken up was nearly one sixth of the record 442 billion euros pumped out in late June and far less than the 135 billion euros a Reuters poll predicted banks would demand.

This suggests that conditions on interbank money markets have improved significantly in the past three months as economies worldwide rebound from the worst global slump since the Great Depression.

The one-year loans are the most spectacular of the ECB's raft of so-called enhanced credit measures designed to fuel the economy and promote the flow of credit between commercial banks and the wider economy.

This time around, a total of 589 commercial banks requested a total of 75.241 billion euros, an ECB statement said.

Businesses, consumers still suffering from credit freeze

Despite the surge of funds into the market, new private sector lending within the eurozone has almost dried up, according to an ECB report released Friday.

ECB president Jean-Claude Trichet insisted on Monday that the central bank expected banks to fulfil their role in lending to businesses and households.

Analysts have warned that companies might have difficulty in obtaining financing during the economic recovery phase, and some say lending to the private sector could begin to contract despite the flood of central bank cash.

The latest ECB loan operation was modest in size, Capital Economics economist Jennifer McKeown told AFP news agency it "is unlikely to do a great deal to stimulate bank lending."

She was encouraged however by signs "that banks feel more able to borrow from each other," renewing the normal state of affairs that was disrupted with the collapse of US investment bank Lehman Brothers one year ago.

Credit window 'closing'

The latest operation is expected to be followed by one more 12-month loan in December, at which the interest rate might be higher, a separate statement said Tuesday, signaling that end of the central bank's exceptional intervention in the lending markets was drawing to a close.

"That window is gradually closing," Kenneth Broux, financial markets economist at Lloyds bank in London, told the Reuters newswire.

"The economy has turned a corner and the bottom line is that central banks are making the first tentative steps towards unwinding the emergency liquidity programs, and maybe the ECB will do so in the next few months as well."

bn/AFP/Reuters
Editor: Sam Edmonds