Despite the turmoil in Greece, the sense of impending doom in the eurozone has subsided since December when – after much pleading – the European Central Bank rode to the rescue by providing huge loans to the region’s banks.

The result? Yields on the government debt of the most troubled countries in the region have fallen. The cost of borrowing money overnight has dropped. European bank shares have risen by 20 per cent. And to add to the feelgood factor, the European Banking Authority said on Thursday that banks’ plans to raise capital by July to meet targets set by the regulator were (generally) on track.

Much of the credit for these improvements is due to the ECB giving banks easier, cheaper and longer access to borrowing than the market would. In December, it lent over 500 banks nearly €500bn for three years at just 1 per cent. At the end of this month it may provide double this. And at the same time it has eased the rules on what collateral banks have to put up against the money they have borrowed.

For the banks it is a no-brainer. The money they borrow from the ECB is cheaper and carries less onerous conditions than any other loans available. And many observers, who also seem to believe the ECB’s money is “free”, do not understand why it did not step in earlier.

But it is dangerous to ignore the negative consequences of the ECB’s actions. The bank’s balance sheet – which measures the consolidated assets of the eurozone’s financial system – has ballooned from €1.4tn just before the collapse of Lehman in September 2008 to €2.7tn. By printing money, the ECB is ushering in the possibility of a significant increase in inflation. In addition, the ECB is now very highly leveraged – the amount that has been lent compared to its capital and reserves is, at 36 per cent, near its all-time high.

This is perhaps not an overwhelming worry – after all, if Greece’s banks, for example, default on their loans from the ECB, it is not like a high street bank that could go bust itself.

But there are other concerns. Although Europe’s banks may well be buying more sovereign bonds as a result of the ECB’s generosity, they are not recycling its largesse into the real economy. According to the ECB’s own survey of bank lending, credit to companies, households and consumers has tightened even further – with lending rates nearly doubling in the last quarter of 2011.

And the dangers of allowing banks to borrow at artificially low rates go beyond that. It discourages the still-bloated sector from consolidating – very few banks in Europe have closed or merged since the financial crisis. And if the money that banks are lent is mispriced, then they, in turn, have a tendency to misprice the risk they take. It was, after all, inappropriately cheap money that fuelled the property booms in Ireland and Spain that have imploded so disastrously for those economies.

Europe’s white knight may well turn out to be a devil in disguise after all.

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