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2011-09-15 14:15:30
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.