World's central banks flood market with dollars

By Carlo Piovano

Associated Press

Published: Thursday, Sept. 15 2011 12:00 a.m. MDT

LONDON — Five of the world's top central banks acted jointly Thursday to provide unlimited dollar loans to banks, a move aimed at easing the growing tensions in the eurozone's financial sector and shielding the global economy from its jitters.

The European Central Bank said it will coordinate with the U.S. Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank to offer three-month dollar loans to banks through the end of this year. There was no separate statement from the Fed.

The coordinated effort aims to prevent Europe's debt crisis from derailing the global economy's rebound from recession, a topic that will dominate talks between U.S. Treasury chief Timothy Geithner and his European counterparts at a meeting from Thursday night through Saturday in Poland.

European banks have seen their shares sink recently on fears they were having trouble getting short-term loans from each other because of fears they were exposed to huge losses from the government bonds of Greece and other troubled eurozone countries.

When a bank is rumored to be in danger of suffering large losses, other banks will stop lending to it for fear of not getting their money back — a scenario that created the global credit crunch in 2008. Ultimately, the threat to the wider global economy is that banks will stop lending to businesses, stifling growth.

Stocks, particularly banking shares, and the euro rallied Thursday on hopes the dollar loans will relieve the funding pressures.

The program will likely prevent a panic for the next few months, but it's only a first step, said Mark McCormick, a currency strategist at Brown Brothers Harriman.

"You're warding off contagion and crisis, but it's not going to solve the problem, which is too much debt," McCormick said, but added it was smart for the central banks to address the problem early.

Indicators of banking stress now are the worst they have been in three years, he said, but they remain better than they were before the U.S. investment firm Lehman Brothers failed exactly three years ago — on Sept. 15, 2008 — setting off a worldwide credit crunch.

Financial markets have been hugely volatile for weeks on fears that Europe's debt crisis will spin out of control and threaten Europe's banking sector. Moody's ratings agency this week downgraded two major French banks on those concerns.

McCormick said the long-term impact of Thursday's move was uncertain.

"I think a lot of people took it as a red flag, but it's more of a pre-emptive strike to get ahead of the stresses that we had when Lehman failed," he said.

Markets and the euro currency, which were already higher on the day, were buoyed by the news. The 17-nation euro currency surged to a daily high of $1.3934 before retreating slightly to $1.3858.

Shares in French bank BNP Paribas in Paris jumped 13.4 percent while Societe Generale gained 5.4 percent. Traders had singled them out in recent days as being particularly exposed to the bad debt of Greece.

The news out of Greece was downbeat Thursday, with its finance minister warning that Greece must brace for a fourth year of recession, and data showing that unemployment had hit a new record of 16.3 percent. As the government debated new public sector cuts to secure the cash lifeline protecting the country from a chaotic bankruptcy, residents once again hit the streets of Athens for anti-austerity protests.

Finance Minister Evangelos Venizelos says the Greek economy will contract 5.3 percent this year, much more than previously expected, but emergency measures such as a new blanket property tax will plug a revenue shortfall.

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