ECB to lend 442 bln euros

Bloomberg

The Frankfurt-based ECB filled all bids in its first auction of 12-month loans to banks at the current benchmark interest rate of 1 percent. It said the 1,121 banks that participated will receive the funds Thursday.

The ECB, battling Europe’s worst recession since World War II, is concentrating its efforts on lubricating the banking system, which accounts for about three quarters of company financing in the region.

The central bank has cut interest rates to a record low and will next month start buying 60 billion euros of covered bonds to help free up credit. The ECB has been lending banks as much money as they want against eligible collateral for up to six months since October last year. It announced in May it would extend the maximum maturity on its loans to 12 months.

ECB council member Axel Weber said Tuesday he expects the 12-month loans to "lead to a further narrowing of spreads" on longer-term market interest rates. Demand for shorter-term ECB loans may wane as a result or the new auction, he said.

On Tuesday, the ECB’s allotment of 7-day loans to banks fell to the lowest amount since Lehman Brothers Holding filed for bankruptcy nine months ago.

The European Central Bank expects the economy of the 16 euro nations to shrink about 4.6 percent this year before returning to growth by the middle of next year. Loans to the private sector declined for a third straight month in May as banks tightened lending standards and demand for credit wilted.