Sat, Oct 08, 2011 - Page 10 News List

ECB throws sinking banks a lifeline

BUYING SOME TIME:Europe’s central bank said that it would bring back year-long loans, while the European Commission sought a coordinated capital injection

Bloomberg

The European Central Bank’s (ECB) move to keep eurozone banks afloat is buying governments more time to recapitalize them as Greece edges closer to default.

The ECB said on Thursday it would reintroduce year-long loans, giving banks access to unlimited cash through January 2013, and resume purchases of covered bonds to encourage lending.

At the same time, the European Commission is pushing for a coordinated capital injection into banks and German Chancellor Angela Merkel said policymakers “shouldn’t hesitate” if it turns out financial institutions are undercapitalized.

“Politicians, including Angela Merkel, have finally realized the urgency in protecting banks as a Greek default can no longer be ruled out and no one wants a Lehman in Europe,” said Christoph Kind, head of asset allocation at Frankfurt Trust, which manages US$24 billion. “From its side, the ECB is making sure that banks won’t face funding issues throughout that period.”

Financial shares advanced on Thursday after Merkel fed speculation that policymakers are working on plans to boost bank capital to stem the spread of the sovereign debt crisis.

Europe’s rescue fund, the European Financial Stability Facility, could be relied upon as a last resort to bolster banks if needed, she said, adding that Germany is ready to discuss possible bank aid at this month’s EU summit.

European leaders are under pressure from global counterparts to find a solution to the debt crisis as it threatens to tip the world economy back into recession. EU leaders hold a summit on Oct. 18 followed by a meeting of the G20 on Nov. 3 and Nov. 4.

French President Nicolas Sarkozy said he would discuss banks with Merkel when he visits Berlin tomorrow.

Germany’s Deutsche Bank AG on Tuesday scrapped its profit forecast and announced 500 job cuts and further writedowns on Greek bond holdings, while Belgium’s Dexia SA is facing its second bailout in three years.

The ECB’s measures buy banks “a lot of time as Europe is basically moving toward recapitalizing the sector,” said Silvio Peruzzo, an economist at Royal Bank of Scotland Group Plc in London. “Where the ECB can and does contribute very aggressively is to breaking the nexus between the sovereigns and the banks.”

Banks’ overnight deposits with the ECB jumped to the most in more than a year this week as concern about other institutions’ sovereign debt holdings discouraged them from lending to each other.

“For the banking sector the focus is more on liquidity rather than capital,” UniCredit SpA CEO Federico Ghizzoni said in an interview published on Thursday.

Policymakers are “determined to do everything necessary to ensure that Europe’s banks are able to play their essential role in lending,” European Commission President Jose Barroso told reporters in Brussels on Thursday. “Close coordination at European level is essential.”

Chairing his final rate-setting meeting before handing the reins to Italy’s Mario Draghi at the end of the month, Trichet resisted calls to reverse two rate increases earlier this year even as the debt crisis threatens to tip Europe back into recession.

Klaus Baader, co-chief economist at Societe Generale SA in London, said the ECB’s decision to focus on greasing the banking sector rather than cutting rates “is a completely appropriate reaction to the current conditions” as “the problem in the euro area is not an excessively high level of short term interest rates.”

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