Six of world's central banks move to stop market freeze
Published 01/12/2011 | 05:00
STOCKMARKETS soared as six of the world's richest central banks announced a co- ordinated effort to outflank European political deadlock and unlock the financial markets themselves.
The US Federal Reserve led a synchronised wave of announcements from the Bank of England, the European Central Bank and the central banks of Canada, Switzerland and Japan to pump liquidity into the markets.
The emergency action to stop the international financial system from freezing up again came amid rumours that a European bank was facing difficulties and could not raise money. Panic was sparked on German bond markets and credit to European banks threatened to freeze.
British banks were also warned by the financial services Authority, the City watchdog, that they must make preparations for the collapse of the single currency.
The six banks said they were cutting the cost of dollar swap lines, effectively halving the price of banks borrowing dollars to fund themselves from 100bps to 50bps above a base rate. They aimed to unblock the flow of money which, compounded by a severe loss of confidence, is threatening to freeze the financial system again.
It came as Poland's Finance Minister Jacek Rostowski, whose country holds the rotating EU presidency, said he expects the European heads of government to press ahead with changes to the Lisbon Treaty when they meet next Friday.
France and Germany aim to propose major changes to the way eurozone countries run their public finances.
"The market likes the news but it is not a game changer," Brian Devine, chief economist with NCB stockbrokers, said.
A dramatic rally was triggered on global stock and commodity markets as traders bet that the powerful economies had lost patience with European indecision.
There was speculation that it could be the first in a series of co-ordinated actions to resolve the financial crisis, including radical bond buying by the ECB.
Within 10 minutes, Germany's leading DAX index had soared by more than 3pc.
By the close the Euro Stoxx was up 3.6pc, the Dax had climbed 5pc and the French CAC 4.2pc. Stock markets in the debt-stricken Italy and Spain also rose more than 3.5pc each.
The FTSE100 climbed 3.2pc -- its biggest rise for eight weeks.
American markets followed suit with strong gains.
Jeremy Cook, economist at World First, said it was a "critical moment" and a "turning point" for the global crisis.
"Clearly the world's central bankers have had enough of all the political mud-slinging and intransigence and they've decided to take the situation by the scruff of the neck," he said.
Analysts are now hoping that this will force European leaders into agreeing the "big bazooka" of a grand rescue plan involving tighter budget rules and massive ECB intervention at next week's meeting of EU leaders.
France and Germany aim to propose major changes to the way eurozone countries run their public finances next Friday, with much closer fiscal integration and the right to sue those who break EU budget rules in the European Court of Justice.
The European Commission has also proposed that, before budgets are voted on in national parliaments, Brussels would have the right to examine them, and demand changes.
In another day of turmoil in Brussels, European finance ministers also admitted that they had failed to raise enough funds for a rescue fund to prop up the single currency.
The International Monetary Fund (IMF) is expected to assist in the bailout plan -- and a senior European official warned that there were now just 10 days to save the euro.
Olli Rehn, the European Commission vice-president responsible for economic affairs, warned that a summit of Europe's leaders on Friday December 9 was now crucial.
"We are now entering the critical period of 10 days to complete and conclude the crisis response of the EU," he said.
As finance ministers met in Brussels, Herman Van Rompuy, the EU's president, said that Europe's governments need to "confront" a looming catastrophe.
"The trouble has become systemic. We are witnessing a full-blown confidence crisis," he said.
Alain Juppe, the French foreign minister, raised the stark prospect of a return to violent conflict on the continent.
While the scope of the changes that are to be proposed on December 9 is unclear, EU officials are privately talking about a partial loss of fiscal sovereignty for eurozone countries in exchange for stability and future joint debt issuance.
Polish finance minister Mr Rostowski said that after those proposals are accepted, there should be action taken in an extremely forceful way to ensure stabilisation of the markets.
He did not refer directly to the European Central Bank, but eurozone officials see it as the only institution now that has enough resources to take on markets.
He said it would be extremely important to stabilise the markets quickly because the proposed changes to eurozone fiscal rules could not become part of the treaty in the short term. "There will be worries, they will take time . . . so it is absolutely essential that we really ensure that markets are properly stabilised," he said.
"I think that all, almost all ministers are aware (of this need)," he said. Right now, ECB intervention was the only viable option left.
"My view is that this is not controversial and it's also my view that on its own, the treaty changes that are likely to be proposed . . . are only sufficient in the medium to long run to achieve the stabilisation of markets," he said.
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