By Scott Lanman and Jeff Black
Six central banks led by the Federal Reserve made it
cheaper for banks to borrow dollars in emergencies in a global effort to ease Europe’s sovereign-debt crisis.
Stocks rallied worldwide, commodities surged and
yields on most European debt fell on the show of force from central banks aimed
at easing strains in financial markets. The cost for European banks to borrow
dollars dropped from the highest in three years, tempering concerns about
euro’s worsening crisis after leaders said they’d failed to boost the region’s
bailout fund as much as planned.
“It’s supportive but not necessarily a game changer,”
said Michelle Girard, senior U.S. economist at RBS Securities Inc. in Stamford,Connecticut. “The impact is more psychological than anything
else” as investors take heart from policy makers’ coordination, Girard said.
The premium banks pay to borrow dollars overnight from
central banks will fall by half a percentage point to 50 basis points, the Fed
said today in a statement in Washington. The so- called dollar swap lines will
be extended by six months to Feb. 1, 2013. The Fed coordinated the move with
the European Central Bank and the central banks of Canada, Switzerland,
Japan and the U.K.
The six central banks also agreed to create temporary
bilateral swap programs so funding can be provided in any of the currencies
“should market conditions so warrant.” Those swap lines were also authorized
through Feb. 1, 2013.
Starting December
The swap lines were previously set to expire Aug. 1,
2012. The new pricing will be applied to operations starting on Dec. 5.
Seven-day loans would carry an interest rate of about 0.58 percent, down from 1.08 percent,
based on the current one-week overnight index swap rate of 0.08 percent. OIS is
a measure of expectations for the benchmark federal funds rate.
“This was in response to increased tension in global
financial markets,” Bank of Japan Governor Masaaki Shirakawa said at a press conference in Tokyo today. “Coordinated action will give markets a sense of security.”
The action wasn’t aimed at supporting any specific
financial institution, Canadian Finance Minister Jim Flaherty said in a
Bloomberg Television interview in New York.
The Standard & Poor’s 500 index jumped 3.5 percent to 1,237.24 at 1:05
p.m. in New York, and the Stoxx Europe 600 Index surged 3.6 percent. The euro
strengthened to $1.3449 from $1.3317 late yesterday. The yield on the 10-year
Treasury note climbed to 2.06 percent from 1.99 percent.
“When there’s concerted action by central banks, it’s
definitely good,” said Jens Sondergaard, senior European economist at Nomura
International Plc in London. “But are liquidity injections a game changer when the heart of the
problem is in European sovereign debt markets?”
European Banks
European banks gained, with Barclays Plc (BARC) climbing as much as 9.4 percent in London
trading. Deutsche Bank rose as much as 7.3 percent in Frankfurt, while BNP Paribas SA and Credit Agricole SA gained
in Paris.
Today’s move echoes coordinated actions from the
financial panic starting in 2007 to create and expand the currency-swap lines,
whose use peaked at about $583 billion in December 2008. The central banks also
jointly lowered their benchmark interest rates in October 2008.
Fed policy makers voted 9-1 for the swap action in a
Nov. 28 videoconference, with Richmond Fed President Jeffrey Lacker dissenting, Michelle Smith, a Fed spokeswoman,
said in an e- mail. Lacker voted in place of Philadelphia Fed President Charles Plosser, who was unavailable for the meeting, Smith said.
Laura Fortunato, a spokeswoman for Lacker at the Richmond Fed, didn’t
immediately respond to a request for comment.
No Current Difficulties
The Fed said U.S. financial companies “currently do
not face difficulty obtaining liquidity in short-term funding markets.”
“However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an
effective liquidity backstop for such institutions and is prepared to use these
tools as needed to support financial stability and to promote the extension of
credit to U.S. households and businesses,” the central bank said in the
statement.
U.S. House Financial Services Committee Chairman
Spencer Bachus, an Alabama Republican, said in a statement that the move “is a
recognition of the interconnected nature of the global economy” and that it’s
in America’s interest to see Europe recover. At the same time, the action
“should not and cannot absolve European policymakers from the need to resolve
their own problems,” Bachus said.
China Move
Two hours before the Fed announcement, China cut the
amount of cash that the nation’s banks must set aside as reserves for the first
time since 2008. The level for the biggest lenders falls to 21 percent from a
record 21.5 percent, based on past statements.
While today’s move by the six central banks is likely
to ease tensions in money markets, it falls short of some calls for the ECB to
step up and act as lender of last resort for the governments of the 17-member
euro area and buy unlimited amounts of government bonds. Germany, Europe’s largest economy, has resisted the idea, arguing it isn’t the
ECB’s job to do so and would only be a temporary fix.
The ECB unexpectedly cut its benchmark interest rate
Nov. 3 by 25 basis points to 1.25 percent as the turmoil threatened to drag the
euro area into recession. ECB policy makers next meet Dec. 8, while Fed
officials gather Dec. 13.
Seven-Day Refinancing
Yesterday, the ECB allotted the most to banks in its
regular seven-day refinancing operation in more than two years, lending 265.5
billion euros ($357.5 billion). The ECB offers unlimited funding to euro-area
banks against eligible collateral.
“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 Fed statement said.
Under the dollar liquidity-swap program, the Fed lends
dollars to the ECB and other central banks in exchange for currencies including
euros. The central banks lend dollars to commercial banks in their
jurisdictions through an auction process.
The swap arrangements were revived in May 2010 when
the debt crisis in Europe worsened. The Fed three months earlier had closed all
swap lines opened during the financial crisis triggered by the
subprime-mortgage meltdown in 2007.
Dollar Tender
European lenders asked for a total of $395 million in
the ECB’s 84-day dollar tender conducted in coordination with the Fed on Nov.
9. In the first offering on Oct. 12, the ECB lent six banks $1.35 billion for
three months. The next three-month loan will be offered on Dec. 7.
The coordinated action “lowers the cost of emergency
funding and increases the scope,” Mohamed El-Erian, chief executive officer, of
Pacific Investment Management Co. said in a radio interview today on “Bloomberg
Surveillance” with Ken Prewitt and Tom Keene.
Central banks “are seeing something in the functioning
of the banking system that worries them,” El-Erian said.
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