Liquidity injection

The second massive liquidity injection by the European Central Bank (ECB) has met with technical success but still leaves lingering doubts over what results this financial free-for-all will bring. The bank has apportioned a total of more than 529 billion euros in three-year loans to some 800 banks at an interest rate of one percent. Sensibly, the ECB has applied the principle that in times of recession, the system requires abundant financial resources so that it can alleviate tensions in the short term. This sensible approach stands in marked contrast to the corseted fiscal views coming out of Germany.

The extent of the latest injection of liquidity can be measured by the number of financial entities which took part in the auction: 300 more than in the first, last December. We can thus deduce that the ECB has lowered the bar on who is allowed to participate. Many small and midsized banks have joined in and, at last, lenders have set to one side their fears of being stigmatized for accepting assistance from the euro-zone's central bank. After all, everyone is affected by the confidence crisis, and ignoring the help on offer out of some misguided sense of prestige can only damage balance sheets still further.

But European financial problems, and in particular those of Spain, are not limited to a question of liquidity. Or, in any case, they have long since ceased to be merely that. The man problem is one of balance-sheet quality. Taking the first auction as a precedent, we can guess that banks will not use this new liquidity from the ECB to give loans to businesses and individual customers, thereby stimulating investment and job creation. Part of the funds received will revert back to the ECB to cover previous loans; and the rest, according to the intentions of ECB President Mario Draghi and his staff, could be used for the purchase of sovereign debt.

But in terms of credit for families and businesses, we are likely to see the same result as before — in other words, practically nothing. The banks (including, of course, Spain's cajas, or savings banks) have yet to get beyond the thinking that the best way of meeting capital requirements in these times is by not offering any new loans. They are content to refinance old debts.

It goes without saying that this approach is a major obstacle in the path of economic recovery, however reasonable financial institutions think they are being. It confirms that the rebuilding of confidence in the banking sector and all that this implies was and still is more important than any other reform. Sadly, the time that has been wasted in Europe and in Spain suggests that the normalization of credit flows, which will be the last phase in the shoring up of the banking sector, will not occur until the middle of next year.