Five central banks plan to pump U.S. dollars into European banks
The Federal Reserve and four other central banks moved to inject billions of U.S. dollars into Europe’s troubled banking system, giving a dose of confidence to investors who have grown worried about the ripple effects of the Greek debt crisis.
The coordinated action is intended to give large European banks ample access to dollars, thus heading off the risk of a lending crunch that could gum up the credit markets and worsen the global economy.
European banks, particularly in France, have had trouble raising dollars from U.S. investors and financial institutions, which are scared off by the Europeans’ heavy exposure to Greece. European banks need the cash to make loans to their U.S. customers and repay their own dollar-denominated borrowings.
Central bankers are heeding lessons from the bankruptcy of Lehman Bros. Holdings Inc., whose sudden collapse three years ago this week intensified a global credit crunch that weighed heavily on economies around the world. Much like what the central banks are trying to accomplish now, the Fed during the financial crisis launched programs to make it easier for banks to raise funds needed to operate.
The fortunes of U.S. banks are closely linked to their European counterparts, and the Treasury Department is worried that problems at European banks could lead to a contagion that afflicts U.S. institutions.
Global stock markets rallied Thursday as investors cheered any hint that governments were moving to defuse the European debt crisis.
“Any signs that steps are being taken to contain the problem are seen as an opportunity to recover some of the lost ground in the market,” said John Ryding, chief economist at RDQ Economics in New York.
The Dow Jones industrial average rose 186.45 points, or 1.7%, to 11,433.18, marking the fourth consecutive rise in the blue-chip index.
The Standard & Poor’s 500 index climbed 20.43 points, or 1.7%, to 1,209.11. The Nasdaq composite index advanced 34.52 points, or 1.3%, to 2,607.07.
International markets rallied sharply, with exchanges in Germany, France, Spain and Italy each rising more than 3%. European stocks have plunged over the last two months and fell to new lows earlier this week.
French banking giant BNP Paribas soared more than 13% while Societe Generale rose more than 5%.
Investors moved out of investments perceived as safe, such as gold and Treasury bonds.
Gold fell $45 to $1,778.50 an ounce, nearly $100 below the peak it reached late last month. The yield on the 10-year Treasury note climbed back above 2%, rising to 2.08% from 1.99% on Wednesday.
Along with the Fed, the dollar action was undertaken by the European Central Bank, the Bank of England, the Bank of Japan and the Swiss National Bank.
The move was the latest in a series of steps that European leaders have taken in the last two months to aid the banks and overcome the continent’s debt crisis.
However, investors have grown increasingly concerned that European lawmakers lack the political will to do what’s needed to get past the crisis, including stronger nations, primarily Germany, providing financial assistance to weaker ones and countries such as Greece and Italy taking even harsher austerity measures.
The persistence of the European debt drama has frustrated U.S. policymakers. Treasury Secretary Timothy F. Geithner is expected to attend a meeting of European finance ministers in Poland beginning Friday to press his counterparts for stronger action to stem the crisis.
Some experts said the central bank action was expected and was only a temporary fix for deeper structural problems.
“It confirms the severity of the problem, which is a drying up of the short-term funding markets for European banks,” said David Malpass, an economist at Encima Global in New York. “The European banks are in no better position than before the funding markets dried up.”
