Almost $540 billion in one-year emergency loans provided by the European Central Bank (ECB) to help the commercial banks at the peak of the financial crisis last year, will expire Thursday. The ECB has offered to extend extra borrowing opportunities in order to keep a nervous market satisfied.
The loans were given with a low 1 percent interest rate and for a year, and although some banks pleaded for an extension of 12 months, the ECB is said to be concerned that providing cheap loans for a longer period would distort markets and could restrict room to maneuver with respect to monetary policy.
Financial institutions have been reluctant lately to lend to some banks in countries like Spain and Greece, whose economies have suffered the most in the crisis.
To prevent creating too big a problem in terms of the ability to pay back loans, the ECB will ensure liquidity is still available. Ewald Nowotny, member of the ECB Governing Council, said on Tuesday that “ending of the 12-month tender is accompanied by a number of actions to ensure that there will be no liquidity squeeze,” according to Reuters.
Starting Wednesday, the ECB will offer unlimited three-month funds.
The market still worries that some smaller, weaker banks will have a hard time shifting from 12-month loans to shorter term money. In response, the exchange rate between the euro and the Swiss franc (CHF)—used as a benchmark currency since the franc usually fluctuates in step with the euro—hit an all time low. On June 29 the exchange rate was 1 euro to 1.33 CHF, compared to 1.53 CHF one year ago.
The loans were given with a low 1 percent interest rate and for a year, and although some banks pleaded for an extension of 12 months, the ECB is said to be concerned that providing cheap loans for a longer period would distort markets and could restrict room to maneuver with respect to monetary policy.
Financial institutions have been reluctant lately to lend to some banks in countries like Spain and Greece, whose economies have suffered the most in the crisis.
To prevent creating too big a problem in terms of the ability to pay back loans, the ECB will ensure liquidity is still available. Ewald Nowotny, member of the ECB Governing Council, said on Tuesday that “ending of the 12-month tender is accompanied by a number of actions to ensure that there will be no liquidity squeeze,” according to Reuters.
Starting Wednesday, the ECB will offer unlimited three-month funds.
The market still worries that some smaller, weaker banks will have a hard time shifting from 12-month loans to shorter term money. In response, the exchange rate between the euro and the Swiss franc (CHF)—used as a benchmark currency since the franc usually fluctuates in step with the euro—hit an all time low. On June 29 the exchange rate was 1 euro to 1.33 CHF, compared to 1.53 CHF one year ago.
