Stampede! The European Central Bank's lending of €489-billion to more than 500 banks was nothing short of a feeding frenzy. It was more than expected, but hardly a surprise given the starvation diet imposed on the sector by jittery markets. Netting ECB loans due against this week's lending, the banking sector is €210-billion the richer in cash.
This should ease fears of an imminent collapse. But what will banks do with the funds?
In theory, quantitative easing would flow into the real economy, reducing any credit squeeze. But the pattern of the past three years suggests that banks, eyeing a stormy 2012 and seeing few signs of a thaw in public markets, will instead hoard the cash.
The money -- and there is another three-year loan offer in February -- should ease the pressure on banks to dump assets at firesale prices to raise cash. Disposals can proceed at a steadier pace. This is good, if not for the so-called "vulture" funds circling Europe in the hope of rich pickings. But the hoarding suggests the funds will instead flow to that traditional parking space for spare cash; euro zone government bonds. Excepting Germany, these also offer hefty interest rates compared with the current 1 per cent charged by the ECB. This produces a nice little earner for banks -- and a neat source of potential funds for cash-strapped governments. Thursday's €489-billion covers Spain and Italy's combined debt redemptions for 2012, for example.
There is of course an irony in the fact that banks' ditching of their sovereign holdings in the last year is partly to blame for the rise in government borrowing costs. There is then further irony in that the market freeze which produced Thursday's feeding frenzy was in part the result of worries about banks' exposure to sovereign debt. Buying more government bonds does nothing to square this vicious circle, it just buys some breathing space to repair balance sheets and restore public finances. Investors and taxpayers can only hope politicians and bankers use the time wisely.