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Europe bids to prop up banks as US urges rapid action

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Europe bids to prop up banks as US urges rapid action

ECB

(BERLIN) - The European Central Bank Thursday announced new measures to provide cash-strapped banks with liquidity as US President Barack Obama stressed Europe must act quickly in its ongoing debt crisis.

Markets cheered the news the ECB would beef up "non-standard" action to help out lenders as the European Commission called for "coordinated action" to recapitalise banks and Germany said it should be done without delay.

While ECB chief Jean-Claude Trichet stopped short of cutting rates at the last meeting of his eight-year term, he said the bank would continue to assist lenders although he also urged them to bolster their balance sheets.

The ECB "urges banks to do all that is necessary to reinforce balance sheets (and governments)... need to take decisive and front-loaded action to bolster public confidence in the sustainability of government finances," said Trichet.

The Bank of England also took bold steps to reinvigorate the sluggish British economy, reinstituting its quantitative easing (QE) policy, whereby it pumps cash directly into the system to boost activity.

The BoE voted in favour of increasing its QE policy by GBP 75 billion (86 billion euros, $115 billion) to GBP 275 billion over a four-month period while keeping its main interest rate at a record-low 0.50 percent.

Earlier Thursday, European Commission President Jose Manuel Barroso said the EU was looking at "coordinated action to recapitalise banks and get rid of toxic assets they may have," with a "real mess" in the eurozone needing a fix.

As Europeans scrambled to reasssure investors that the continent's banks were safe, Obama reiterated his warning that the issue had to be resolved now.

"The problems Europe is having today could have a very real effect on our economy at a time when it's already fragile," Obama told a White House news conference.

Europeans "have got to act fast," he added.

"We have got a G20 meeting coming up in November. My strong hope is that by the time of that G20 meeting, that they have a very clear concrete plan of action that is sufficient to the task."

Some progress was made Thursday when the the Netherlands parliament approved new powers for the 440-billion-euro ($590 billion dollars) euro rescue fund, making it the 15th eurozone country to do so.

"The bill has been approved," parliamentary chairwoman Gerdi Verbeet said of the beefed-up European Financial Stability Facility (EFSF), which has still to be approved by Malta and more problematically, by Slovakia where opposition is very strong.

All 17 eurozone states must pass it for it to become effective, with Malta voting Monday and Slovakia on Tuesday.

In Berlin, meanwhile, Chancellor Angela Merkel insisted banks should be recapitalised without delay, if needed.

"I think there would be a very clear need (to recapitalise) because this is money that is safely invested... I don't think we should hesitate," Merkel said.

There would be "far greater damage" if banks needed to be rescued by governments, she said, adding: "But the first step is for banks to recapitalise themselves."

As if to emphasise the urgency of the task facing Europe, the NYSE Euronext stock exchange suspended trading in the shares of Dexia bank as France and Belgium put together a rescue package for the lender.

The European Banking Authority is readying an audit of the strength of the continent's main banks, this time pricing in the possibility that they could have to take large losses on their holdings of bonds issued by weak eurozone member states, especially Greece.

Speculation is growing that private investors will have to write off more of Greece's debt than previously thought, perhaps as much as 50 percent.

In Greece, the epicentre of the maelstrom, Prime Minister George Papandreou was due to meet his ministers to discuss the crisis as German Economy Minister and Vice Chancellor Philipp Roesler arrived in Athens.

Civil servants staged a 24-hour walkout Wednesday in protest at a government plan to sideline 30,000 staff to reduce the deficit in return for the next installment of debt rescue funding.

But in some positive news for Athens, eurozone chief Jean-Claude Juncker said that an international group of auditors assessing the state of Greek reforms would likely give the green light for its next slice of aid.

"The troika (the International Monetary Fund, the European Central Bank and the European Union) will probably present the report on October 24," said Juncker, who heads the group of eurozone finance ministers.

"I think the troika will make a positive decision," he added.

Greece says it needs the next tranche of aid, worth some eight billion euros ($11 billion) to pay its bills but eurozone finance ministers delayed action on the money again at a meeting Monday in Luxembourg.

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