The European Central Bank (ECB) started off well with unlimited three-year financing at one percent offered to the banking sector, which was battered by the debt crisis and paralyzed private credit markets. The breath of air from the ECB, a stroke of good luck for European banks because they were able to buy public debt at yields greater than the cost of the loans, was necessary to ease tensions in the market and make it easier for lenders to worry about more than yields.
Cleaning up their balance sheets without getting farther behind is a necessary step for getting back to normal. Yesterday a 489 billion euro stimulus from the German central bank surpassed expectations, which reveals a waning thirst for liquidity among lenders and the seriousness of the problems we are going through.
Not only that, but the ECB's conduct could strengthen the bonds between national treasuries and banks that has nearly dissolved. And banks are once again very dependent on Draghi's ECB.
The aid was necessary, because it has kept the ailing banks alive, but it is not enough because the real economy cannot just vegetate but needs to get back on the road to recovery, which is something that the help from the ECB cannot do in the near term. Banks need to strengthen their capital reserves as mandated by the European Banking Authority (EBA), and they have a lot of accounts to clean up if they want to become solvent. If they can achieve these goals then the ECB's aid will filter down to the real economy, which is the ultimate objective for restructuring the European banking sector.
