Bold Bid To Save The Euro Is Unleashed

The European Central Bank has announced its biggest ever liquidity operation, worth almost half a trillion euros, to shore up confidence in the eurozone and its cash-starved banks.

It made 489 billion euros (£409bn) of emergency funding available to 523 banks who requested it.

The eurozone banks involved have not been identified.

The three year loans are ultra-cheap and designed to help banks who are struggling to borrow money on the open market.

Demand far exceeded analysts' expectations.

In London, the move boosted investor sentiment towards the wider sector with Royal Bank of Scotland (LSE: RBS.L - news) , Lloyds Banking Group (LSE: LLOY.L - news) and Barclays (LSE: BARC.L - news) all climbing to the top of the gains list on the FTSE 100 Index.

But the key question arising from the demand is was the take-up a sign of banks in distress - or an opportunity to borrow cheap money that was too good to turn down?

Martin van Vliet, analyst at ING Bank, said doubts remain over whether the money will be used to support weaker eurozone economies.

He said while the take-up was "massive", the number of banks involved was smaller than the 1,121 two years ago when 442 billion euros (£369bn) in one year loans was made available.

That would suggest the participating banks were concentrated in the weak periphery of the eurozone.

Lending between banks - and wider credit - has concerned the ECB enough to offer more lenient terms on loans.

Its (Euronext: ALITS.NX - news) core interest rate has also been slashed twice in five weeks, to 1% - the level at which the loans were offered.

Sky's economics editor Ed Conway sees the ECB's move as "doling out nuclear-quantity medicine to the eurozone."

Economists expect the single currency area to enter a mild recession in 2012 - which would make it even harder for debt-laden governments such as Italy to get a handle on their debt burdens.

The 37-month term of the most recent round of loans allows banks to get the money need to pay off large chunks of their own maturing debts in the first part of the new year.

While this will aid banks in the short term, there are doubts about whether the move will help ease the sovereign debt crisis.

Jane Foley, senior foreign exchange strategist at Rabobank, told Sky News: "Certaintly, lots of banks will not want to be increasing their exposure to that debt.

"So the sovereign debt crisis is still going at full throttle but this certainly should ease a lot of pressures within the banking sector."