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Banks act as EU crisis rages

Robin Emmott and
Kirsten Donovan / 1 December 2011

BRUSSELS/LONDON - The world’s major central banks acted jointly on Wednesday to provide cheaper dollar liquidity to starved European banks facing a credit crunch as the eurozone’s sovereign debt crisis threatened to bring financial disaster.

The surprise emergency move by the US Federal Reserve, the European Central Bank, the Bank of Japan and the central banks of Britain, Canada and Switzerland recalled coordinated action to steady global markets in the 2008 financial crisis.    

The euro and European shares surged on the news, which came after eurozone finance ministers agreed to ramp up the firepower of their bailout fund but acknowledged they may have to turn to the International Monetary Fund for more help.        

In a related move, Italy’s central bank started emergency cash tenders for banks which have been squeezed particularly hard in recent weeks as Rome’s borrowing costs have soared towards eight per cent, a level seen as unaffordable in the long term.  

“We are now entering the critical period of 10 days to complete and conclude the crisis response of the European Union,” Economic and Monetary Affairs Commissioner Olli Rehn said as EU finance ministers met.

Two years into Europe’s debt crisis, investors are fleeing the eurozone bond market, European banks are dumping government debt, south European banks are bleeding deposits and a recession looms, fuelling doubts about the survival of the single currency.          

Eurozone leaders have agreed belatedly on one half-measure after another but have failed to restore confidence and now face a crunch moment at a December 9 Brussels summit seen by some analysts as a make-or-break moment for the euro.            Finance ministers agreed on Tuesday night on detailed plans to leverage the European Financial Stability Mechanism (EFSF), but could not say by how much because of rapidly worsening market conditions, prompting them to look to the IMF.            

Italian and Spanish bond yields resumed their inexorable climb towards unsustainable levels on Wednesday, as markets assessed the rescue fund boost as inadequate.  The 17-nation Eurogroup adopted detailed plans to insure the first 20-30 per cent of new bond issues for countries having funding difficulties and to create co-investment funds to attract foreign investors to buy eurozone government bonds.      

Both schemes would be operational by January with about €250 billion from the eurozone’s EFSF bailout fund available to leverage after funding a second rescue programme for Greece, Eurogroup chairman Jean-Claude Juncker said.         

The aim was for the IMF to match and support the new firepower of the EFSF, Juncker told a news conference.    

But with China and other major sovereign funds cautious about investing more in eurozone debt, EFSF chief Klaus Regling said he did not expect investors to commit major amounts to the leveraging options in the next days or weeks, and he could not put a figure on the final size of the leveraged fund.        

“It is really not possible to give one number for leveraging because it is a process. We will not give out a hundred billion next month, we will need money as we go along,” Regling said.           

Most analysts agree that only more radical measures such as massive intervention by the ECB to buy government bonds directly or indirectly can staunch the crisis. The prospects of drawing the IMF more deeply into supporting the eurozone are uncertain. Several big economies are sceptical of European calls for more resources for the global lender.


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