The European Central Bank is lending its banks a record $645 billion to retain credit flow and encourage banks to give loans to businesses and households.
This new cash flush exceeds the $577 billion lent two-years ago, and is part of the largest European loan operation ever. The money is being lent at the current benchmark interest rate of 1%, with Barclays estimating that the project will release $252 billion into the European economy.
The ECB reports a total of $59.7 billion is being transferred into new three-year loans from October's one-year loan. Over 1,100 day loans were made available on December 22, with 523 European banks already seeking funds.
In late February, ECB will offer a new three-year loan. In addition to long-term loans, the ECB is allowing more banks to borrow and providing $33 billion in regular dollar offerings for 2 weeks.
EU Debt At $1 Trillion
ECB President Mario Draghi said to the European Parliament that banks will experience “very significant funding constraints” next year. Roughly 80% of Eurozone lending is from European banks.
A study by the Bank of England claims that Eurozone banks will need to refinance 35% more debt than in 2011. France and Germany will need more than $230 billion to repay their loans and debts, while Italy will need roughly $300 billion for its debt. Altogether, the Eurozone will need over $1 trillion dollars to repay its debt.
Italian and Spanish yields on government bonds fell days after the loan announcement.
Bank of New York's Chief Currency Strategist Simon Derrick and French President Nicolas Sarkozy believe the loans will allow banks to purchase more government debt. Although Eurozone liquidity will improve due to the loans, more measures are needed to ensure a stable euro.
Eurozone Consumer Confidence Drops
Confidence among those in the EU-17 has declined from -20.4 in November to -21.2 according to the European Commission's monthly survey. December marked the sixth consecutive month of declining confidence in the economy.
European analysts speculate that the decline is due to the threat of a recession, slow job market, drop in fiscal funding, struggling indebted nations and financial market instability.
As a result of poor confidence levels, six Eurozone nations have reported a decline in gross domestic product in the third quarter, and two member nations had stagnant national growth. Spending levels throughout the Eurozone are expected to drop, and the EU itself may experience a contraction in the fourth quarter.
There is some good news: German consumer and business confidence indexes increased in December, and Belgian business confidence also improved. The ECB cut its interest rate in hopes of preventing a recession.
Meanwhile, the EU-27 zone as a whole also experienced a decline in consumer confidence from -20.7 to -21.9.
Key Statistics – Europe's Economy, December 2011 (source: EU Business, online business information service)
- The European Union trades at a $1.4 billion surplus with nations that are not part of the EU.
- Hourly labor costs in the EU have risen 2.7%.
- Construction output has declined by 1.4% in the EU-27.
- In Europe, real income has increased 6.7% for the average agricultural worker.