Stocks rally as world central banks in pact to save eurozone
Published 30/11/2011 | 13:41
STOCK markets rallied today after the world’s central banks introduced a coordinated action to ease financial strains against the backdrop of the eurozone debt crisis.
Six central banks, the European Central Bank, the US Federal Reserve, the Bank of England and the banks of Switzerland, Canada and Japan are all involved in the unexpected, but positive, decision.
The moves are designed to help households and businesses access finance more easily and will start on December 5 by providing cheaper lending to banks.
They have agreed to cut the cost of temporary dollar loans, called liquidity swaps, they offer to banks by 0.5pc.
The euro and stock markets gained on the news which many see as the biggest move yet to save the euro after Germany failed to step up to the plate.
Analysts said the move is keeping investors happy because the move sends a signal that central banks will do whatever is necessary to keep the banking system afloat.
Germany’s DAX jumped 4.5pc while in Paris the CAC gained 3.6pc and London added on 2.9pc.
In the US, the Dow Jones Industrial Average jumped 400 points to 11,957 points.
The banks have also agreed to reduce the pricing of existing dollar swap operations with the US Fed while other currencies will also be involved.
“The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity,” the European Central Bank said in a statement.
“These central banks have agreed to lower the pricing on the existing temporary US dollar liquidity swap arrangements by 50 basis points so that the new rate will be the US dollar Overnight Index Swap (OIS) rate plus 50 basis points.
“The authorisation of these swap arrangements has been extended to 1 February 2013.”
Earlier today, Economic and Monetary Affairs Commissioner Olli Rehn warned there were just 10 days to save the eurozone.
Following on from a meeting in Brussels yesterday where finance ministers agreed to increase the firepower of the European Financial Stability Fund (EFSF) and look for the backing of the International Monetary Fund, Mr Rehn said: “"We are now entering the critical period of 10 days to complete and conclude the crisis response of the European Union.”
The 17-nation group announced plans to insure the first 20pc to 30pc of new bond issues for countries with funding difficulties like Italy and Spain.
Next week eurozone leaders meet at a European Council meeting where further measures are expected to be announced.
But France’s central bank governor said at a conference in Singapore that the EFSF is already struggling.
"It must also be remembered that the EFSF is already funding at very wide (borrowing) levels over Germany, struggled in its last auction to raise the required funds and would have its rating put under severe pressure by any rating downgrade of France," Rabobank strategists said in a note.
"This must call into question any plans related to the EFSF. It is yesterday's solution and the market has simply moved on."
Meanwhile, Taoiseach Enda Kenny has welcomed coordinated action from banks around the world to boost liquidity in the European markets.
Mr Kenny, who earlier warned of a real and present danger surrounding the deepening eurozone crisis and collapse of the euro, said the moves had already taken effect.
"I understand that there has been an initial reaction that has been very beneficial for markets, though we've had that in the past," said Mr Kenny. "But it is welcome.
"It leads now to a real focus by political leaders on the political crisis in the eurozone, and I hope that the deliberations over the next week will lead to a point where there can be clarity and decisiveness about this, because it is so important for every country in the eurozone, the EU and beyond."
Mr Kenny added that he believed the euro could be saved.
"I'm a believer in politics and in making decisions," he said. "I believe personally it can be saved and it will be saved.
"It requires more decisiveness and clarity and courage in making decisions here."
But the Taoiseach warned that European leaders must still act decisively when they meet for a summit next week in a bid to prevent the spread of contagion.
Failing to do so, he said, would put Ireland's future at stake.
"This is a matter of the highest concern and urgency," said Mr Kenny.
"There is a real and present sense of danger, with many openly suggesting that the very future of the currency as we know it is at stake."
He said he intends to table his own views and proposals at the summit on December 9.
The Taoiseach said the ECB was Ireland's answer to the threat of contagion, which includes a potential second collapse of the national economy and, in a worst case scenario, the fall of the euro.
The Economic and Social Research Institute (ESRI) earlier revealed that the economy will grow by only 0.9pc next year - a steep reduction from its previously predicted 2.3pc.
Its report pointed out that Ireland may still be able to reach its fiscal targets but will find it more difficult to do so given the deepening crisis in Europe.
Fianna Fail leader Micheal Martin had accused the Taoiseach of keeping the Government in the dark over Ireland's contingency plans should the crisis turn into a catastrophe.
"Can you confirm that the Government has plans for worst case scenario?" asked Mr Martin. "People are talking about a crisis turning into a catastrophe."
Mr Kenny insisted that he intends to make his voice heard at the summit, when European Council President Herman Van Rompuy is expected to present a paper on easing the crisis.
"We've got views and I won't be afraid to discuss them when we get out there," said Mr Kenny.
The Taoiseach added that other suggestions he intends to table will include some form of eurobonds and changes within the existing European treaties, explaining: "It is the ends and not the means that are critical here."
He added: "In my approach to the meeting I will be reminding colleagues that, economically, Ireland remains vulnerable."