The European Central Bank is intending for its second round of
cheap loans to be the last, placing the responsibility for the long
term future of the eurozone back in the hands of governments.
Many of the ECB's 23-man governing council are hoping that
demand for the auction on 29th February will fall short
of the 1 trillion euros that are being made available. They are
concerned that banks will become over-reliant on ECB funds, instead
of lending to each other. The first round of cheap loans was
offered in December in order to offset an interbank lending freeze,
which could have significantly worsened the debt crisis in the
region. Banks rushed to take advantage of the offer, and ECB
President said that the loans had prevented "a major, major credit
crunch".
Many European official had been hopeful that the ECB would
continue to support the economy via the cheap money auctions, known
as Long Term Refinancing Operations (LTROs). However, the central
bank wants to encourage governments to improve their defence of the
eurozone by bolstering the European Stability Mechanism (ESM),
which will come into being in the middle of this year, and by
adopting better economic policies. They fear that continuing the
LTROs might fuel a credit binge, which could lead to a rise in
inflation.
The first LTRO was effective in easing market pressures, with
Italy and Spain seeing lower borrowing costs, interbank lending
rising, and stock markets rallying. The ECB has accepted that they
need to help the banking sector, but want to make it clear that
this type of stimulus cannot go on indefinitely. It hopes that the
latest round of loans will be used to buy up high-yield bonds,
especially those issued by Italy.