Major central banks to provide dollars to banks: ECB

(FRANKFURT) - Top central banks promised Thursday to lend dollars to banks who find themselves short of the US currency in the ongoing eurozone debt crisis, a move that boosted the euro and stock markets.

The move sent stocks soaring and gave a boost to the euro, just hours after the EU warned that the eurozone debt crisis was bringing growth to a standstill although the region will likely escape outright recession.

"The governing council of the European Central Bank (ECB) has decided, in coordination with the Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank, to conduct three US dollar liquidity-providing operations with a maturity of approximately three months covering the end of the year," the ECB said in a statement.

The operations would be additional to the ongoing weekly seven-day operations launched in May 2010.

Some European banks have run into serious problems in borrowing dollars recently because the US funds that normally lend to them have become reluctant to do so for fear of contagion from the eurozone debt crisis.

The combination of the debt crisis and liquidity squeeze threaten to turn into a credit crunch according to some bankers.

European stocks soared on the news, with Paris' CAC-40 rising 3.27 percent. French banks shares, which have been hit hard in recent weeks over concerns over their dollar liquidity and Greek exposure, shot up with BNP Paribas soaring 13.4 percent, Credit Agricole 5.9 percent and Societe Generale 5.4 percent.

Frankfurt's DAX closed up 3.15 percent, London's FTSE-100 2.11 percent, Milan 3.56 percent, and Madrid 3.63 percent.

The euro rose briefly above to $1.39 for the first time this week on the news, before drifting back to $1.3866 in late afternoon trade.

Only on Wednesday, the ECB said it lent $575 million (418 million euros) to two eurozone banks this week in a sign the banks are having increasing difficulty in obtaining dollar funding via the markets.

The ECB did not name the banks concerned, but it is the first time for a month that banks in the region have taken advantage of the facility, which the central bank operates with the US Federal Reserve.

The banks borrowed the funds at an interest rate of 1.1 percent, higher than they would have paid in commercial markets.

Dollar funding costs have risen in recent days amid worries Greece could default on its debt.

The ECB lent $500 million to a single bidder under the facility on August 17.

In the latest coordinated action, the central banks will lend dollars to banks for a period of three months in the form of fixed-rate repurchase operations against eligible collateral, the ECB explained.

Banks can submit their bids for the funding on October 12, November 9 and December 7.

Market players saw the move as more symbolic, which few banks would actually make use of.

"But it's necessary to reassure the markets," one banker told AFP, speaking on condition of anonymity.

Analysts agreed.

It's "a natural reaction to latest events. There had been increasing evidence that European banks had problems getting dollar funding in the US, both in the interbank market and the Fed's liquidity window," said Carsten Brzeski, senior economist at ING Belgium.

"It shows that the ECB remains determined to do everything it can to fight the symptoms of the sovereign debt crisis," the analyst said.

But "as I've often said, it is the symptoms, not the cause. Only eurozone governments can solve the debt crisis."

EU finance ministers meet in Wroclaw, Poland, for dinner on Thursday ahead of two days of talks centred on a new Greek rescue package that was agreed by eurozone leaders in July but has yet to be implemented.

The package also includes beefing up the EFSF temporary bailout fund with more funds and powers such as helping recapitalise banks.

The central bank action followed a gloomy economic report from the European Commission.

EU Economic Affairs Commissioner Olli Rehn said the economy was set to come to a "virtual standstill" in the second half of the year, but he assured that Europe would avoid another recession.

Although the growth forecast for 2011 remained at 1.6 percent, it will slow to 0.2 percent in the third quarter and a mere 0.1 percent in the final three months of the year, worse than previously thought.

"The sovereign debt crisis has worsened, and the financial market turmoil is set to dampen the real economy," Rehn said.

European banks will have to cut back hard on their activities in the United States and will probably have to cut lending in Europe, because of the eurozone crisis and money market tensions, a Dexia bank executive warned on Thursday.

"Everything is in place massively to organise a credit contraction" in Europe, Dexia vice chairman Pierre Mariani warned as banks moved to reduce risk amid market tensions and new rules requiring them to boost capital ratios.