European Central Bank offers lifeline to ailing eurozone lenders

European Central Bank chief Jean-Claude Trichet offered European banks emergency short-term loans. Speculation is rising over a plan by EU leaders to recapitalize banks.

Jean-Claude Trichet, outgoing president of the European Central Bank (ECB), brought good news and bad news to Berlin.

At the meeting of the ECB Governing Council in the German capital – the last he chaired before handing over the reins to the Italian Mario Draghi – Mr. Trichet first gave a rather pessimistic prognosis for Europe, saying "the economic outlook remains subject to particularly high uncertainty and intensified downside risk.”

But then Trichet offered European banks a lifeline – fresh money in one-year loans.

The so-called long-term refinancing operations will be conducted in October and December.

On top of these long-term loans to banks, the ECB will buy government bonds worth 40 billion euros, Trichet announced. At the same time, the ECB will keep interest rates at 1.5 percent.

The emergency loans will ease the pressure on Europe’s increasingly nervous banks.

Uncertainty about the exposure to sovereign debts of ailing eurozone economies like Greece, Portugal, and possibly even Spain and Italy has raised tensions between lenders. There is a general agreement among European leaders and international financial organizations that a program to recapitalize EU banks is necessary.

Earlier this week, the Franco-Belgian Dexia bank had to ask for urgent government intervention after its high exposure to Greek debt drove it to the brink of collapse. The same bank received billions of euros of taxpayer money during the 2008 financial crisis and earlier this year passed the so-called stress test comfortably.

The test was designed to show whether banks possessed a big enough safety cushion of capital to weather payment defaults – including those of sovereign debtors.

Today the rating agency Moody’s downgraded two big Italian banks, Intesa Sanpaolo and UniCredit as well as several big state-controlled companies like the utilities Eni and Enel.

Meanwhile, in Brussels, the president of the European Commission, Manuel Barroso, helped fuel expectations that European leaders were preparing a plan to solve the crisis.

In a televised interview, Mr. Barroso said that “the commission was proposing coordinated action to recapitalize European banks and help them get rid of toxic assets they might hold.” German Chancellor Angela Merkel, who held talks with Trichet, IMF director Christine Lagarde, and World Bank president Robert Zoellick in Berlin today, already signaled she would support such a recapitalization.

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