2nd Oct 2023

Japan, Switzerland and US take steps to protect EU banks

  • Lehman Brothers. The dollar loans were announced on the third anniversary of the Lehman bankruptcy (Photo: sachab)

Five international central banks have decided to provide special loans of US dollars to European banks in a bid to restore confidence in their ability to survive a Greek default.

The European Central Bank (ECB), using dollars swapped for euros from the US Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank will make the loans available at fixed interest rates on a three-month basis in three separate auctions, with the first auction on 12 October.

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The move was unveiled on Thursday (15 September), the third anniversary of the collapse of the Lehman Brothers bank in 2008, which heralded the start of the global financial crisis.

It follows a ratings agency downgrade earlier this week of French lenders Credit Agricole and Societe Generale, as well as an agency warning on BNP Paribas.

The three banks have a collective exposure of €42 billion to Greek sovereign bonds, which are rated at junk status. Fears of a Greek default have seen US lenders shut down loan facilities to exposed European banks in recent weeks, creating a potential liquidity crisis.

The announcement saw shares in the banks recover a large chunk of losses made earlier in the week and the euro rise almost one percent against the dollar.

Speaking at an event in the Woodrow Wilson Center think-tank in Washington on Thursday, the recently-appointed French chief of the International Monteray Fund (IMF), Christine Lagarde, said: "We have entered into a dangerous phase of the crisis".

"I believe there is a path to recovery, much narrower than before, and getting narrower. To navigate it, we need strong political will across the world", she added. "Weak growth and weak balance sheets - of governments, financial institutions, and households - are feeding negatively on each other, fueling a crisis of confidence and holding back demand, investment, and job creation".

For his part, ECB head Jean-Claude Trichet told a meeting of the Eurofi Financial Forum think-tank in Wroclaw, Poland: "We avoided a dramatic economic depression in the autumn of 2008 - following the collapse of Lehman Brothers three years ago to this very day. But we still have a long way to go to move beyond this crisis".

He added: "The globally co-ordinated decision we published this afternoon on US dollar liquidity-providing operations is a clear illustration of our very close co-operation at the global level".

The chief of the Banque de France, Christian Noyer, in an interview with French daily Les Echos published on Friday morning said French banks are "solid without exception".

He indicated the dollar injection has nothing to do with Greece because the country will not default. "Greece itself has no interest in defaulting. The political, economical, social consequences would be dramatic. No one would lend them money for a long time", he explained.

Analysts see the move as a clear sign that Greece is on the ropes despite two EU and IMF bail-outs, however.

"If Greece were to default, an announcement that there would be unlimited liquidity available from central banks is one of the things you would want to have in place beforehand", Nick Parsons, head of strategy at National Australia Bank told The Guardian.

EU finance ministers and US treasury chief, Tim Geithner, are on Friday to hold a closely-watched informal meeting in Poland, the current EU presidency country.

Financial newsire Reuters cited an EU official as saying that Geithner will recommend the EU's €440 billion bail-out fund, the EFSF, should be used as collateral to enable the ECB to buy more weak eurozone government bonds on the model of the so-called Talf fund set up by the US in 2008, which has helped US banks to keep lending money.

"Geithner will probably insist on the importance of leverage to have more funds to ringfence the big Europeans, Italy and Spain, and to find a solution for Greece", the EU official said.

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