FRANKFURT, Germany -- The European Central Bank loaned a massive 489 billion euro ($639 billion) to hundreds of banks for an exceptionally long period of three years to shore up a financial system that is under pressure from the eurozone's government debt crisis.
It was the biggest ECB infusion of credit into the banking system in the 13-year history of the shared euro currency.
Wednesday's loans to 523 banks surpassed the 442 billion euro ($578 billion) in one-year loans from June, 2009, when the financial system was reeling from the collapse of U.S. investment bank Lehman Brothers.
The ECB is trying to make sure that banks have enough ready cash so they can keep on lending to businesses. Otherwise, a credit crunch could choke off growth and spread the debt crisis to the wider economy through the banks.
Markets rose modestly on the outsized amount of credit support, which was far higher than the 300 billion euros ($392 billion) expected, but the advance soon faded as the loans highlighted the problems facing Europe's banks. The Stoxx 50 of leading European shares was down 0.2 percent, while the euro was trading 0.4 percent lower at $1.3063.
"The good news is, the ECB's efforts to increase liquidity are working," said Jennifer Lee, an analyst at BMO Capital Markets. "The bad news is, high demand for the loans creates worries that banks are urgently in need of funds to boost liquidity ."
Helping the banks may be crucial in the year ahead, as many economists think the eurozone may be headed for recession. Slowing growth would make it even harder for the over-indebted governments that are at the heart of the eurozone's crisis to get a handle on their debt burdens. A recession in Europe would lower tax receipts and make government debt burdens even harder to handle.
A default on debt payments by a country such as Italy or Spain could cause a new financial crisis and send the global economy into a slump.
While the loans support the banking system they do not address the deeper problem of too much government debt and the lack of a financial backstop big enough to assure markets that governments will be able to pay their debts.
Italy and Spain have been at the center of investor concerns in recent months as their borrowing costs have risen. Those two are considered big to bail out with the current eurozone bailout funds, which have some 500 billion euros ($654 billion) in financing. Some of that is already committed to bailouts of smaller Greece, Ireland and Portugal, which have all sought outside financial help after default fears drove their borrowing costs so high they could no longer refinance their debts as they came due. Italy has some 1.9 trillion euros in outstanding debt.
The 37-month term of the loans permits the banks to stock up on money for a much longer period and reduces stress on their finances. Many banks have had trouble borrowing from other banks or by issuing bonds as they do in normal times. That is because lenders fear the banks may suffer losses from the crisis and not pay them back.
Of the 489 billion euro ($639 billion) loaned out, some 61 percent was rolled over by banks from other ECB credit offerings, meaning about 200 billion euros ($261 billion) represents new liquidity that wasn't previously in the banking system, according to analysts at the Royal Bank of Scotland. One likely use for at least some of that fresh money is to pay off 230 billion euros ($301 billion) in bank bonds coming due in the first three months of 2012.
The concern has been that if banks cannot borrow to refinance those obligations they will find the money by cutting back on loans to businesses. Those loans enable businesses to operate day to day, expand their operations and hire people.
There was some speculation that the loans would help governments since banks could borrow money cheap from the ECB operation and buy higher-yielding government bonds.
But many analysts think it is unlikely they will increase their exposure to government bonds amid fears of default. Many banks have cut their holdings of debt from governments that are in financial trouble.
"We still believe it is difficult to reconcile a government desire for banks to continue buying debt with the need for banks to reduce risk exposure associated with government debt," said Chris Walker, an analyst at UBS.
In making the loans, the ECB was playing its role of supplier of liquidity, or ready money to operate with, to banks. That is a typical job for central banks, especially in a crisis.
ECB president Mario Draghi has stressed the central bank's role in supporting the banking system even as it has refused to play that role for the indebted governments themselves by buying large amounts of their bonds.
Draghi says governments must be the ones to reduce their spending and deficits, and should not depend on a central bank bailout.
In contrast to its tough line with governments, the bank has made easy and abundant credit to banks its main tool in dealing with the effects of the eurozone's two-year-old financial crisis.
Alongside its efforts to shore up the banks, the European Central Bank has also been cutting interest rates to support the ailing eurozone economy. It has reduced its main refinancing rate from 1.5 percent to 1.0 percent over the last two monthly meetings in the hope that lower borrowing costs will stimulate growth by making credit cheaper for businesses.
Under the terms of Wednesday's loans, the banks will pay the average refinancing rate over the three years. The ECB reviews the rate each month and it will almost certainly change. Banks also have the flexibility of repaying the money after a year if their situation improves.
Still, the credit infusion only treats one of the symptoms of the debt crisis. It does not remove the reasons banks remain wary of lending to each other -- especially, their thin levels of capital reserves against potential losses. And it doesn't cut the large levels of debt carried by governments.
European officials have said banks need to raise 115 billion euros ($150 billion) in new capital -- but finding that money is not an easy task in the current environment of fear. Investors are leery of putting more money into banks. It would be politically unpopular for governments to do it, and their finances are stressed as well.