In a sign that the fallout increasingly is global, the Chinese central bank, which has sought to slow the pace of domestic growth over the last year, also moved unexpectedly but independently Wednesday to encourage new lending by allowing banks to reduce their reserves.
In Europe and the United States, where the announcement broke well ahead of stock market openings, the prospect of more cheap money to ease banks’ operations sent stock indexes soaring. A broad index of German stocks, the DAX, jumped almost 5 percent Wednesday, while the broad measure of American stocks, the Standard Poor’s 500-stock index, climbed more than 4 percent. Short-term borrowing costs also declined modestly for some European governments and banks.
But policy makers and analysts were quick to caution that the Fed’s action did not address the fundamental financial problems threatening the survival of the European currency union. At best, they said, efforts by central banks to ease financial conditions could allow the 17 European Union countries that use the euro sufficient time to agree on a plan for its preservation.
“The European sovereign debt problem will not be solved only with liquidity,” the governor of Japan’s central bank, Masaaki Shirakawa, told reporters in Tokyo. He said that he “strongly” expected Europe to “push through economic and fiscal reform.”
European leaders, increasingly concerned by a deteriorating financial picture, said Wednesday they were forming a plan to convince markets that the debts of nations like Italy and Greece were not overwhelmingly large and to set new rules to constrain borrowing by euro zone members. They pointed to a scheduled meeting in Brussels on December 8-9 as a looming deadline for those efforts.
“We are now entering the critical period of 10 days to complete and conclude the crisis response of the European Union,” Olli Rehn, European commissioner for economic and monetary affairs, said Wednesday after a meeting of European finance ministers.
Politicians in Europe and the United States have seemed paralyzed for more than two years by the twin challenges of reducing debt and increasing economic growth. That has left central bankers to act alone. A JPMorgan Chase analysis of the monetary policy of major central banks found that the tendency was more toward reducing borrowing costs than at any time since the fall of 2009.
The Fed, which announced new measures to stimulate the domestic economy in August and again in September, said the move announced Wednesday was designed to ease a particular strain on the global economy: It has become increasingly difficult for foreign banks to borrow dollars, which they need to finance existing obligations and to make new loans because a significant portion of global financial transactions occur in dollars.
The Fed and the other central banks announced that they would reduce roughly by half the cost of an existing program under which banks in foreign countries can borrow dollars from their own central banks, which in turn get those dollars from the Fed. The banks also said that loans would be available until February 2013, extending a previous cutoff of August 2012.
“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 released by the Fed, the Bank of England, the European Central Bank, the Bank of Japan, the Bank of Canada and the Swiss National Bank.
The dollar crunch is most pronounced in Europe, because American money market funds reduced their investments in continental banks by 42 percent between the end of May and the end of October, according to Fitch Ratings. The retreat from France was particularly severe, with money funds cutting their exposure by more than two-thirds.
The lending program expansion is mostly a protective measure — by easing access to dollars now, the banks can guard against a full-fledged liquidity crisis later. So far, the Fed has just $2.4 billion in outstanding currency loans, including $522 million lent last week to the European Central Bank. By contrast, at the height of the financial crisis in November 2008, the Fed had outstanding dollar swaps with foreign banks of almost $572 billion.
The European Central Bank will next offer dollar loans to banks on Wednesday. “This is something that is very welcome,” Silvio Peruzzo, an economist at the Royal Bank of Scotland in London, wrote in an analysis. “This will not solve all deep-based funding problems which are due to the sovereign debt crisis. But there is an issue with dollar liquidity, especially with foreign currency, and this measure addresses that.”
Stephen Castle contributed reporting from Brussels, Jack Ewing from Warsaw and Hiroko Tabuchi from Tokyo.
Article source: http://feeds.nytimes.com/click.phdo?i=aaebecba830bac80cf2e6d7c0ffd409d
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