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Low-Interest Loans to European Banks Prompt Concern
The New York Times | February 12, 2012 | 03:22 PM EST

Few would begrudge Mario Draghi his boast last week that he and the European Central Bank had prevented a disastrous credit crunch by showering banks with cheap loans in December.

But beneath the gratitude toward Mr. Draghi, the president of the E.C.B., lurks a fear that the easy money could simply be creating the conditions for another banking crisis several years from now.

Thanks to E.C.B. largess, some economists warn, sick banks now face less pressure to confront their problems — to clean out bad loans and other damaged assets, or even wind down operations if there is no hope of a turnaround. The E.C.B., they say, could inadvertently spawn a cohort of “zombie banks” like the ones that helped make the 1990s a lost decade for Japan.

“It’s a huge bet,” said Charles Wyplosz, a professor of economics at the Graduate Institute in Geneva. “If the crisis ends up well, the E.C.B. will have pulled off a miracle. If things go wrong, then commercial banks will be in a much worse situation than they were before.”

Mr. Wyplosz said the E.C.B. might ultimately be making the banking system more fragile by encouraging institutions to load up on risky assets, especially government bonds from troubled euro zone countries like Spain or Italy. Banks can use those assets as collateral for more E.C.B. loans.

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