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By JACK EWING
Published: September 15, 2011
FRANKFURT Central banks moved Thursday to assuage fears that European banks
could be threatened by a shortage of dollars, as they were at the height of the
2008 financial crisis, and opened new lines of credit to institutions in the
first such show of force in more than a year.
Stock markets rallied after the European Central Bank said it would allow banks
to borrow dollars for up to three months, instead of just for one week as
before. The E.C.B. said it was acting jointly with the Federal Reserve of the
United States, the Bank of England, the Bank of Japan and the Swiss National
Bank.
It was the first coordinated effort to provide dollars since May 2010, and
seemed to go beyond just providing reassurance that European banks would not be
cut off by American lenders wary of their financial state. The central banks
seemed determined to demonstrate that they would not hesitate to deploy their
combined weight to keep the European sovereign debt crisis from becoming a
bigger threat to the global economy.
They are getting together and acting together, Christine Lagarde, the
managing director of the International Monetary Fund, said in Washington on
Thursday. To me, that is the most important message.
But Ms. Lagarde also warned that policy makers have depleted their ammunition
since the financial crisis of 2008, and suggested that more action is needed.
We have entered into a dangerous phase of the crisis, she said. There is
still a path to recovery, she said, but it is "a narrow one."
The central bank action comes as European finance ministers and other key
policy makers gather in Wroclaw, Poland, for a meeting on Friday. U.S. Treasury
Timothy F. Geithner, who is scheduled to attend, is expected to urge European
officials to act more aggressively to contain the crisis, which has already
begun to undercut growth in Europe.
An official forecast from the European Commission warned Thursday that growth
in Europe will come to a virtual standstill toward the end of the year. The
commission, the European Union s executive body, cut the growth forecast for
the euro area to 0.2 percent for the third quarter and 0.1 percent in the
fourth, down from 0.4 percent for both periods.
It said, though, that a double-dip recession would be avoided.
There was speculation that Mr. Geithner would press European ministers in
Wroclaw to increase the resources available to their bailout fund for the euro
zone countries. But among European leaders, and even within the European
Central Bank, there remained deep disagreements about how to prevent the
problems of tiny Greece from destroying the common currency.
Members of the euro area are still struggling to ratify an expansion of the
bailout fund that they agreed to in July. A further expansion of the fund might
raise fears that the increased obligations would hurt some countries credit
ratings.
Part of the problem for policy makers is that they are still waiting for last
big initiative to get off the ground, said Peter Westaway, chief European
economist at Nomura in London. We re all kind of on hold until then.
Last week, divisions within the E.C.B. broke into the open after J rgen Stark,
a member of the bank s executive board, unexpectedly resigned in apparent
dismay over the bank s growing purchases of government bonds.
In a speech in Vienna on Thursday, Mr. Stark did not discuss the reasons for
his resignation but warned against ill-considered action at the European level
which may ease market pressure in the short term, but in the long term risk the
stability and ultimately the survival of economic and currency union.
Mr. Stark also said that errant government debtors should face strong
sanctions, a view echoed by German Chancellor Angela Merkel on Thursday during
a visit to the Frankfurt Motor Show, where the prowess of German industry was
on lavish display.
Last week, divisions within the E.C.B. itself broke into the open after J rgen
Stark, a member of the bank s executive board, unexpectedly resigned in
apparent dismay at the bank s growing purchases of government bonds.
During a speech in Vienna on Thursday, Mr. Stark did not discuss the reasons
for his resignation but warned against ill-considered action at the European
level, which may ease market pressure in the short term, but in the long term
risk the stability and ultimately the survival of economic and currency union.
Mr. Stark, while agreeing that central banks needed to assure the banking
system has adequate liquidity, also said that errant government debtors should
face strong sanctions. That view was echoed by the German chancellor, Angela
Merkel, on Thursday during a visit to the Frankfurt Motor Show. Everyone must
do their homework, Mrs. Merkel said.
Germany has a duty and responsibility to make its contribution to securing the
euro s future, Mrs. Merkel said. But, in a comment that could reinforce
perceptions that political leaders are determined to move at their own pace and
not be driven by financial markets, she added that stabilizing the euro area
won t happen overnight or with any one-time thunderbolt.
The majority of members on the E.C.B. s governing council, which is made up of
the executive board and the chiefs of 17 national central banks, are less
hawkish than Germany. Lorenzo Bini Smaghi, also a member of the E.C.B. s
executive board, said Thursday that it would be a mistake to leave countries at
the mercy of financial markets, which he said were not functioning properly.
We cannot hide behind principles and rules designed for a theoretical
situation, which no longer corresponds to the reality, Mr. Bini Smaghi said in
Rome.
His comments were an implicit riposte to German critics who have accused the
E.C.B. of betraying its mandate by buying the government bonds of Greece,
Italy, Spain and other euro area countries to help keep their borrowing costs
from spiraling out of control.
Mr. Bini Smaghi warned, though, that E.C.B. bond buying cannot be a substitute
for stronger government action.
Dollar shortages were a feature of the crisis that followed the collapse of
Lehman in 2008 and can be a severe problem for banks that have obligations in
the United States that they must refinance.
U.S. money market funds and other institutions have cut European banks access
to about $700 million in short-term loans over the past year, according to
research by JPMorgan Chase and CreditSights.
European banks have only rarely used an existing one-week dollar credit line
offered by the E.C.B., since tapping the facility has been viewed by markets as
confirmation that the banks are having problems accessing dollar funds. On
Thursday, two banks borrowed $575 million from the facility. The E.C.B. does
not disclose the identity of the borrowers.
The two banks were the first to tap the dollar credit line since August, when
one bank borrowed 500 million. That, in turn, was the first use of the dollar
facility since February.
By making dollars available for a longer three-month period, the central banks
are providing reassurance that ailing banks will not be dependent on the more
fragile one-week funding. The E.C.B. will offer the dollars in three
operations, starting on Oct. 14 and again in November and December. The other
central banks will follow similar schedules. The Fed will not offer loans
directly, but will provide dollars to the E.C.B. by way of a swap agreement.
Borrowing banks must supply collateral in the form of bonds or other
securities, but so far they have only used a fraction of the collateral on
their books, giving them in theory unlimited access to cash.
Underlining the problems that weaker countries are having financing their
governments, Spain paid a high price to issue bonds Thursday. The bond due Oct.
31, 2020, was sold at an average yield of 5.16 percent, compared with 5.2
percent when it was last sold on Feb. 17.
Stephen Castle reported from Wroclaw, Poland. David Leonhardt and Leonard Apcar
contributed reporting from Washington.