Central banks act as euro zone crisis rages

Wed Nov 30, 2011 1:15pm EST
 
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By Robin Emmott and Kirsten Donovan

BRUSSELS/LONDON (Reuters) - The world's major central banks acted jointly on Wednesday to provide cheaper dollar funding to European banks facing a credit crunch as the euro zone's debt crisis drove EU ministers to urge more IMF help to avert financial disaster.

The emergency move by the U.S. Federal Reserve, the European Central Bank, and the central banks of Japan, Britain, Canada and Switzerland recalled coordinated action to stabilize global markets in the 2008 financial crisis after the collapse of Lehman Brothers.

In Italy, now the focal point of the euro debt crisis, the Treasury started emergency cash tenders for banks which have been squeezed particularly hard as Rome's borrowing costs have soared towards 8 percent, a level seen as unaffordable in the long term.

The euro and European shares surged on the central bank action, which came after euro zone finance ministers agreed to ramp up the firepower of their bailout fund but acknowledged they may have to turn to the International Monetary Fund for more help.

In a policy shift by Europe's main paymaster, Finance Minister Wolfgang Schaeuble said Germany was open to increasing the IMF's resources through bilateral loans or more special drawing rights, reversing the stance Berlin took earlier this month at the Cannes G20 summit.

The new openness to a bigger IMF role came as Germany presses its EU partners to agree next week on treaty changes to create coercive powers to make euro zone countries change their budgets if they breach EU deficit and debt rules.

"The economic and monetary union will either have to be completed through much deeper integration or we will have to accept a gradual disintegration of over half a century of European integration," Economic and Monetary Affairs Commissioner Olli Rehn told the European Parliament.

Two years into Europe's debt crisis, investors are fleeing the euro zone bond market, European banks are dumping government debt, south European banks are bleeding deposits and a recession looms, fuelling doubts about the survival of the single currency.   Continued...