Central banks offer crisis loans to ease euro woe

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 (ECB), 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.

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 trading.

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", the Commission said.