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Last updated: September 15, 2011 7:19 pm
The world’s main central banks took bold concerted action to pre-empt a looming dollar funding crisis in Europe, sparking a rally in eurozone bank shares and the euro.
Five central banks including the European Central Bank, the Bank of England and Switzerland’s central bank said they would provide three-month dollar loans to banks from October, which will cover the year-end period. The display of firepower was intended to prevent an escalation of financial market tensions and signal that authorities are prepared to take action to boost market confidence.
Within minutes of the announcement, European banking shares led a strong rebound in equity markets. BNP Paribas, one of the French banks that had suffered most on rumours of funding problems, rose as much as 22 per cent before closing up 13 per cent. Société Générale, another embattled French bank, finished up 5 per cent while Italy’s Intesa Sanpaolo and UniCredit gained 10 and 7 per cent respectively.
“Central banks are more than ever an anchor of stability and confidence,” said Jean-Claude Trichet, ECB president. The globally co-ordinated effort to provide US dollar liquidity was “a clear illustration of our very close co-operation at the global level and of the unity of purpose”, he said.
“This is good news as the stress in funding markets was starting to become self-reinforcing,” said Huw van Steenis, banking analyst at Morgan Stanley.
A number of gauges of stress in funding markets for European banks fell off from their highest levels since the 2008-09 financial crisis. The euro, which had fallen sharply against the dollar in recent weeks, rose 0.9 per cent to $1.386. US, German and UK government bond yields all moved away from multi-decade lows.
The move by the central banks, in conjunction with the US Federal Reserve, followed escalating difficulties, especially at continental European banks, in obtaining dollar funding as US investors took fright at the eurozone debt crisis. The Bank of Japan, which had already offered three-month dollar liquidity, also said it would be making additional offers to cover the year-end period.
But it also reflected a desire to be forestall tensions rather than addressing immediate needs – in recent weeks there has been scant or zero use of existing weekly ECB offers of dollar liquidity. The three-month maturity of the loans will increase planning security at banks and avoid them having to return weekly for dollars – at the risk of being stigmatised as weak institutions.
The year-end period is often a tense time for banks as they seek to secure strong financial positions for their accounts.
Some investors, however, expressed scepticism over whether the action would be sufficient to lift markets and economies out of their recent funk.
“It takes us back to the first measures of trying to get us out of this hole three years ago. It is helpful but there is only so much that central banks can do,” said Neil Williams, chief economist at Hermes, the UK fund manager.
“We wonder how much added impact this new [swap line] will actually have. Still, it has helped boost sentiment, and these days that accounts for something,” said Win Thin, currencies strategist at Brown Brothers Harriman.
Thursday’s action had been under consideration for some time, according to people familiar with the central banks’ thinking. So far, the ECB has argued it has the instruments in place to provide euro liquidity. But this week saw two banks drawing $575m in its regular weekly offer of dollars – the first time the facility had been used in four weeks. Because the 1.1 per cent interest rate charged was significantly higher than market rates, that suggested the problems at some banks were becoming acute.
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