Wednesday, November 30, 2011

Central Banks Take Coordinated Action

By JON HILSENRATH, WILLIAM LAUNDER and JEFFREY SPARSHOTT

WASHINGTON — The world's major central banks launched a joint action to provide cheap, emergency U.S. dollar loans to banks in Europe and elsewhere, a sign of growing alarm among policy makers about stresses in Europe and in the global financial system.

The Fed, ECB and other central banks took coordinated action to support the global financial system as Europe's rolling debt crisis continues to trouble markets. Vincent Cignarell

The coordinated action doesn't directly address Europe's government-debt and budget woes. Instead, it is aimed at alleviating the impact of those troubles on global markets. Moreover, it raises the prospect of other steps by central bankers to prevent a repeat of the 2008 financial crisis.

"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," said a statement issued by the six central banks—the U.S. Federal Reserve, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank.

Global equity markets rose sharply Wednesday in response to the show of action by central banks. The Dow Jones Industrial Average rose 322 points, or 2.8%, to 11877 in morning trading, and the Standard & Poor's 500 jumped 32 points, or 2.7%, to 1227. The Nasdaq Composite gained 69 points, or 2.8%, to 2584. The Stoxx Europe 600 rose 2.9%, while the German DAX surged 4.3% and France's CAC-40 increased 3.6%. Gold and oil prices rose and the dollar weakened.

WSJ's Charles Forelle reports several of the world's central banks joined forces to make it easier for European banks to access U.S. dollars. AP Photo.
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The promise of cheaper funding from central banks sparked sharp rises in European bank shares and a tightening in credit spreads. Bank shares had been down Wednesday before the announcement, and the cost of insuring European bank bonds against default had soared in recent days. Early in the European afternoon, shares in Barclays PLC, Deutsche Bank AG and Société Générale SA were all up around 6.5%. The Stoxx 600 European banking index was up 4.2%.

U.S. dollar swap lines, as they are known, were launched during the 2008 crisis as the U.S. mortgage crisis spread around the globe. Under the program, the Fed makes dollars available to other central banks, which in turn make the dollars available to banks under their jurisdiction.

The central banks' action on Wednesday effectively made these loans cheaper, lowering their cost by half a percentage point.

Central banks from developed nations took coordinated action to shore up the global financial system. Dow Jones's Geoffrey Smith argues that this kind of joint action only takes places when there are serious problems.

Chinese authorities, in a move that appeared to be separate and uncoordinated, also sought to ease lending conditions by reducing the amount of reserves that Chinese banks need to hold with their central bank.

Global investors have become worried about the health of European banks because of their exposure to European government debt. Because of those worries, euro-zone banks are also facing increasingly strained access to dollars. European banks need the U.S. currency to fund loans they have extended to U.S. companies and consumers, to finance U.S. dollar-denominated securities they hold and to pay their own dollar-denominated loans, such as those on money-market funds.

Some central bankers sought to use the move to put additional pressure on Europeans for more aggressive action in their own right.

"The European debt problem can't be solved by liquidity provisions alone," Bank of Japan Gov. Masaaki Shirakawa said at a hastily arranged news conference. "The step is meant to buy time for European countries to proceed with their fiscal and economic reform."

European Union finance ministers agreed to boost the European Financial Stability Facility but not by as much as expected. Terry Roth and Katie Martin discuss whether this will reassure markets or if more is needed to prevent pressure on the euro?

Berenberg economist Christian Schulz said the move was largely a symbolic gesture aimed at restoring calm.

"With today's action, central banks signal that they are aware of the issue and prepared to act. As always in market panics with central bank action, the signal is more important than the actual size of the action," Mr. Schulz said.

Global central banks have taken coordinated action before. In March, they intervened jointly in currency markets to tamp down the rise in the yen following the earthquake and tsunami in Japan. In October 2008, leading central banks cut interest rates simultaneously to alleviate the shock to the financial system after the collapse of Lehman Brothers.

Over three years of crisis fighting, Fed Chairman Ben Bernanke and the world's other leading central bankers have developed much closer ties. In addition to instituting measures to stem the crisis, they have worked closely together in rewriting financial regulatory rules in the wake of the crisis. The new head of the ECB, Mario Draghi, has been part of this inner circle of central bankers for some time as head of the Financial Stability Board.

It is unclear whether the latest steps marked a prelude to bolder joint action by global central banks to ease financial strains and rev up economic growth.

After resisting calls to save the euro zone, the ECB may be changing its tune, and move towards more decisive action, Simon Nixon reports on Markets Hub.

Several Fed officials have made clear they are open to launching a new round of bond buying, known as quantitative easing, to bring down long-term U.S. interest rates. But they have reservations about whether such a program would be effective.

For now, Wednesday's action looks like a limited move to address a discrete problem. Dollar funding costs for European financial firms have shot up in recent weeks, a signal that Europe's woes could be spreading globally. The new program could alleviate those costs.

The rest of the world hasn't been taking the Fed up on its offer of dollar loans recently. As of Nov. 23, non-U.S. central banks had tapped the Fed for $2.4 billion of U.S. dollar loans. During the financial crisis in 2008, they tapped the Fed for $580 billion.

Under the program, the Fed makes dollars available to the ECB, which in turn lends the money to European banks. Still, market observers say foreign banks are often reluctant to use the facility because it can create the impression among their peers that they are financially strained.

"That facility was a pressure release and how far that release was tapped was closely watched to indicate how much pressure there was in the rest of the market," said Chris Clark, strategist at interbank broker ICAP. "Now that valve has been loosened somewhat we're going to see more people turning up, which is not an indication of more pressure but just that actually it makes more sense for more people to go there. We were already expecting see a fairly increased use of the facility and now we can expect even more."

The Fed faces a risk of political blowback at home for the move. Republicans in particular have attacked the Fed for making dollars available to foreign banks. Fed officials say they don't face much risk with this facility because the dollars are going to other central banks, and not directly to European banks.

The Fed sought to stress that U.S. banks aren't facing funding problems. But it also said that it was prepared to provide liquidity if needed "to support financial stability."

During the financial crisis, the Fed designed many short-term programs to support commercial-paper markets, money-market funds, investment banks and other corners of the financial system when panic led to shortages of short-term dollar funding in the U.S.

Some of the Fed's powers were restrained by the Dodd-Frank financial regulatory overhaul. For instance, it can't bail out individual banks. But it still has leeway to provide short-term credit broadly to markets if needed.

"At present, there is no need to offer liquidity in nondomestic currencies other than the U.S. dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise," the Fed said.

Write to Jon Hilsenrath at jon.hilsenrath@wsj.com, William Launder at william.launder@dowjones.com and Jeffrey Sparshott at jeffrey.sparshott@dowjones.com




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