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European Central Bank loans $639 billion to banks. Will it help?

European Central Bank loans are intended to keep banks lending and avoid a credit crunch. But the head of the European Central Bank resists providing similar help to indebted nations.

By David McHughAP Business Writer / December 21, 2011

European Central Bank President Mario Draghi speaks during a meeting of the Economic and Financial Committee at the European Parliament in Brussels on Monday. The European Central Bank loans were the biggest credit infusion in the 13-year history of the euro.

Virginia Mayo/AP

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FRANKFURT

The European Central Bank flipped its credit tap wide open Wednesday to help Europe's troubled banking system, allowing hundreds of nervous banks to take out a record €489 billion ($639 billion) in loans.

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The European Central Bank loans were the ECB's largest infusion of credit into the banking system in the 13-year history of the shared euro currency. It aimed to keep the Europe's debt crisis from choking off credit to businesses — since a credit crunch could cause a continent-wide recession that would make the debt loads hanging over the 17 nations that use the euro even harder to pay.

Many European banks are also having trouble borrowing normally from other banks — everyone is afraid they won't get paid back because the banks they are lending to may have large amounts of risky European government bonds.

The ECB loans to 523 banks surpassed the €442 billion ($578 billion) in one-year loans from June 2009, when the global financial system was reeling from the collapse of the U.S. investment bank Lehman Brothers.

Wednesday's credit offering, dubbed a longer-term refinancing operation, let banks load up with as much cheap liquidity, or ready money, as they think they need and not have to worry about paying it back until early 2015. It was the first of two three-year credit offerings that the ECB has planned.

The ECB hopes banks can use the credits to help pay off some €230 billion ($300 billion) in bank bonds that are maturing in the first months of 2012. Otherwise, banks would have had to find that money by cutting back on loans to business.

Many economists think that the eurozone is already heading toward at least a mild recession — figures Wednesday showed that Italy, the eurozone's third-largest economy, contracted 0.2 percent in the third quarter.

The deeper the economic slowdown is in the eurozone, the more tax revenues may suffer — and the harder it will be for Europe's indebted governments to handle their debt loads.

Although the ECB credits can help banks and the economy get through the crisis, they don't attack the cause of Europe's problems — too-large amounts of government debt — or convince markets that European governments can get a grip on their public finances. And it doesn't remove one of the main reasons why banks remain wary of lending to each other — their thin levels of capital reserves against potential losses.

All that means despite the massive influx of cash, Europe's debt crisis will still be churning in the New Year.