Major central banks to provide dollars to banks: ECB

15th September 2011, Comments 0 comments

Top central banks promised Thursday to lend dollars to banks who find themselves short of the US currency in the ongoing eurozone debt crisis, a move that boosted the euro and stock markets.

"The governing council of the European Central Bank (ECB) has decided, in coordination with the Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank, to conduct three US dollar liquidity-providing operations with a maturity of approximately three months covering the end of the year," the ECB said in a statement.

The operations would be additional to the ongoing weekly seven-day operations launched in May 2010.

Some European banks have run into serious problems in borrowing dollars recently because the US funds that normally lend to them have become reluctant to do so for fear of contagion from the eurozone debt crisis.

Just a day before, the ECB said it lent $575 million (418 million euros) to two eurozone banks this week in a sign the banks are having increasing difficulty in obtaining dollar funding via the markets.

The ECB did not name the banks concerned, but it is the first time for a month that banks in the region have taken advantage of the facility, which the central bank operates with the US Federal Reserve.

The banks borrowed the funds at an interest rate of 1.1 percent, higher than they would have paid in commercial markets.

Dollar funding costs have risen in recent days amid worries Greece could default on its debt.

The ECB lent $500 million to a single bidder under the facility on August 17.

In the latest coordinated action, the central banks will lend dollars to banks for a period of three months in the form of fixed-rate repurchase operations against eligible collateral, the ECB explained.

Banks can submit their bids for the funding on October 12, November 9 and December 7.

Market players saw the move as more symbolic, which few banks would actually make use of.

"But it's necessary to reassure the markets," one banker told AFP, speaking on condition of anonymity.

Analysts agreed.

It's "a natural reaction to latest events. There had been increasing evidence that European banks had problems getting dollar funding in the US, both in the interbank market and the Fed's liquidity window," said Carsten Brzeski, senior economist at ING Belgium.

"It shows that the ECB remains determined to do everything it can to fight the symptoms of the sovereign debt crisis," the analyst said.

But "as I've often said, it is the symptoms, not the cause. Only eurozone governments can solve the debt crisis."

UniCredit economist Marco Valli said the combination of both seven-day and three-month dollar-liquidity operations "is part of the so-called non-standard measures that will play a crucial role down the road to restore the normal functioning of the monetary policy transmission mechanism."

The ECB would "probably prefer to step up these non-standard measures before seriously considering a cut in interest rates," Valli said.

© 2011 AFP

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