Dollar access no long-term fix for Europe's crisis

By Carlo Piovano and Daniel Wagner

Associated Press

Published: Thursday, Sept. 15 2011 10:00 p.m. MDT

Members of an organization for the deaf protest in central Athens on Thursday. The rally was held to protest cuts in state grants to deaf organizations, resulting in a reduction of sign language teachers.

Associated Press

LONDON — Five central banks acted Thursday to shore up confidence in Europe's financial system by giving its banks far greater access to U.S. dollars.

The move buys time for banks that hold large amounts of debt issued by Greece and other financially troubled European countries. Some of these banks have had trouble paying for daily operations because other banks have refused to lend to them any more.

Under Thursday's action, the banks can borrow unlimited dollars for three months, up from the current one-week limit.

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 the loans through the end of this year. Their move to supply more dollars is similar to steps taken during the 2008 financial crisis and again in May 2010.

The news reassured stock markets, which have been battered by rumors that banks' losses on their loans to Greece might sink them. Stock indexes in France and Germany each surged 3.1 percent. The euro rose against other currencies. U.S. indexes rose by more than 1 percent.

Concern about their access to dollars has been a key reason why European banking stocks have been beaten down. Investors have been particularly worried about big French banks Societe Generale and BNP Paribas. Thursday's news sent Societe Generale's stock soaring 8 percent and BNP Paribas' 13 percent.

Analysts cautioned that the expanded credit line for dollars isn't a long-term solution to Europe's debt crisis. Greece still appears likely to default on its debts. If it did, some banks could topple. Panic might spread among global investors.

The move will likely ward off a panic for the next few months, said Mark McCormick, currency strategist at Brown Brothers Harriman

"But it's not going to solve the problem, which is too much debt," McCormick said.

Still, he said the central banks acted wisely to address the problem now, before pressure on banks intensifies further.

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. That's the scenario that led to the global credit crunch in 2008. Banks will then stop lending to businesses. The funding squeeze stifles growth and hurts the global economy.

Indicators of banking stress are at their worst points in three years, McCormick said. Still, they remain better than before Lehman Brothers failed exactly three years ago — on Sept. 15, 2008 — setting off a worldwide credit crisis.

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

Daniel Alpert, managing partner at the New York investment bank Westwood Capital LLC, said the move allows European policymakers to work through the end of the year to prevent a Greek default from upending the global financial system.

"They're gearing up to allow an orderly default" by Greece and to prop up banks that suffer big losses on bonds issued by Greece and other financially ailing countries, Alpert said.

It provides "some time to put institutional firewalls in place so that the whole place doesn't melt down," he said.

Financial markets have been gyrating wildly for weeks on fears that Europe's debt crisis will spin out of control and imperil Europe's banking sector. Moody's ratings agency this week downgraded Societe Generale and Credit Agricole on those concerns.

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

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