European Central Bank's $645 Billion Loan: A Game-Changer?

Strategic Insights -

The European Central Bank (ECB) recently made a major move, lending $645 billion to more than 500 banks in Europe. This massive infusion of cash has been hailed as a game-changer by Robert Mundell, a noted economist and Professor at Columbia University. Mundell, credited with helping build the single currency, believes this move signals that more aggressive action is on the way from the ECB to combat the European sovereign debt crisis.

Key Takeaways:

  • The ECB's loan of $645 billion to 500+ banks in Europe is the largest single-day expansion of money in history, with a massive increase of EUR490 billion of new money.
  • The loan was extended for up to three years, diverting any immediate banking crisis and providing a market for new government bonds.
  • Mundell sees this as a backdoor quantitative easing, signaling that the ECB may be willing to do more aggressive bond buying next year.
  • The ECB's move has been hailed as a game-changer by Mundell, but some investors are skeptical about whether it will be enough to solve the crisis.
  • Robert Mundell has a significant influence in Europe, having taught many of the economists now working at the ECB, and has recently met with German Chancellor Angela Merkel.
  • The ECB's next move is being closely watched by investors and economists, who are waiting to see if they will be able to do enough to address the crisis and implement a fiscal framework for a United States of Europe.

Statistics:

  • $645 billion: the amount of the ECB's loan to European banks
  • EUR490 billion: the massive increase of new money injected into the system
  • 500+: the number of banks that received loans from the ECB
  • 3 years: the maximum duration of the loan
  • 7%: the yield on Italian 10-year debt, which Mussolini sees as unsustainable

Sources:

  • Robert Mundell interview on Bloomberg TV, December 27, 2011
  • Sara Eisen, Bloomberg News