Central bank loan pledge lifts markets

The world's major central banks have pledged to extend large loans to Europe's fragile banking sector, boosting stock markets around the globe.

The European Central Bank, the US Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank all announced, in co-ordinated statements yesterday, their intention to provide three-month dollar loans to the financial sector over the rest of the year.

The euro rose to US$1.3914 on the news of the expanded dollar loan scheme, while stock markets across Europe, including Paris's Cac and Germany's Dax, closed up more than 3 per cent. Banking stocks rose sharply, with France's BNP Paribas up 22 per cent, while in New York the Dow rose more than 1.6 per cent.

The cost for European banks to swap euros for dollars has risen fivefold over the past three months, reaching the highest level since December 2008, as concerns have intensified about the solvency of some of the borrowers.

The dollar squeeze has also been exacerbated by European banks and their American counterparts moving funds out of Europe in recent months because of exposure fears. French banks, which own around €9 billion ($15 billion) of Greek sovereign debt, have been particularly hard hit by the high cost of dollar funding.

The dramatic move also helped to distract attention from a gloomy forecast by the European Commission earlier in the day that the eurozone economy will stagnate for the rest of the year. The commission halved its forecast for July to September to growth of just 0.2 per cent. The forecast for the last three months of the year is down from 0.4 per cent to 0.1 per cent.

"The outlook for the European recovery has deteriorated", said the Economic and Monetary Affairs Commissioner, Olli Rehn, unveiling the report.

"The sovereign debt crisis has worsened, and the financial market turmoil is set to dampen the real economy". The managing director of the International Monetary Fund, Christine Lagarde, also struck a downbeat note yesterday in a speech in Washington where she criticised "policy indecision and political dysfunction" for threatening the global recovery.

"Without collective, bold action, there is a real risk that the major economies slip back instead of moving forward," she said.

Yesterday the Spanish Government successfully managed to issue €4 billion of bonds to the capital markets, but Madrid was forced to pay an interest rate of about 5.3 per cent, which is only just below distress levels.

The plan

* The European Central Bank will co-ordinate with the US Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank to offer unlimited three-month dollar loans to banks through the end of this year.

* The move aims to ease the growing tensions in the eurozone's financial sector and shield the global economy from its jitters.

- Independent, AP