The world's major central banks have pledged to extend large dollar 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 $1.3914 on the news of the expanded dollar loan scheme, while key 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 per cent in afternoon trade.
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 some €9bn (£8bn) of Greek sovereign debt, have been particularly hard hit by the high cost of dollar funding. On Wednesday the ECB announced that two banks had been forced to utilise its weekly offer of dollar liquidity.
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 €4bn 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.
Trevor Greetham, a portfolio manager at Fidelity Multi Asset Funds, said that the dollar infusion by central banks was a repeat of the joint action they took in December 2007. He said: "Liquidity support will not remove solvency fears as these relate to Greek default and its possible knock-on effects. It's also worth remembering it is the slowdown in global growth over 2011 that is putting increasing pressure on the European periphery."
'Nein' to eurobonds
* A poll of German financial experts has found that 93 per cent are opposed to eurobonds. The survey of 1,479 academics and analysts by the Borsennews.de website also found that 83 per cent believe a debt union with the rest of the eurozone would result in Germany losing its financial independence. On Wednesday the president of the European Commission, Jose Manuel Barroso, said that the Commission will bring forward proposals to introduce eurobonds as part of the solution to the eurozone sovereign debt crisis.Reuse content