Banks take first steps towards saving euro

IN A co-ordinated move, the world’s major banks yesterday provided cheap dollar funding for Europe’s banks in what is seen as a first major step to save the single currency.

The emergency move by the European Central Bank, the US Federal Reserve and the central banks of Britain, Switzerland, Canada and Japan was well-received by markets and saw the euro and European shares rise.

Meanwhile, finance ministers from the 27 EU countries meeting in Brussels approved two instruments they hope will significantly increase the amount of funding the bailout fund can raise on the markets using the €250 billion left in the fund.

However, even if it raises the optimistic goal of €800bn it would not be sufficient to remove both Spain and Italy from the danger zone as markets continue to insist on ever-increasing returns for their sovereign debt.

Instead, as the EU’s triple-A rated states refused to invest further in the European Financial Stability Fund (EFSF), they agreed to switch focus to the IMF. They would be willing to lend money to the IMF on a bilateral basis and allow them to fund indebted eurozone nations.

The move, mooted at the G20 summit in Cannes a few weeks ago where it was not enthusiastically received, found more favour yesterday with the better-off euro states. German finance minister Wolfgang Schaeuble said they were now open to such an idea.

Polish finance minister Jacek Rostowski said that while the EFSF chief, Klaus Regling, had been optimistic on the firewall effect of the leveraged fund, he admitted, “it is only part of the firewall that we need”.

It is hoped that these efforts, combined with an agreement on Treaty change to be decided at next week’s EU leaders summit, will calm markets. However, Mr Rostowski warned that proposals on Treaty change should not be taken for granted.

EU Council president Herman Van Rompuy is to table his ideas to embed in the EU Treaty stricter economic governance and oversight of national budgets by the EU together with the ability to bring eurozone states to court if they breach the rules.

Mr Rostowski warned: “On its own, Treaty changes likely to be proposed are sufficient in the medium and long run to achieve stabilisation of the markets, but not in the short term because they cannot be introduced fast enough.”

He described it as one side of a coin, the other being a “fully credible and powerful firewall to prevent contagion and ensure markets are properly stabilised”.

The European Commission has put forward proposals for eurobonds and many believe this will be the ultimate solution, with all eurozone countries guaranteeing the bond, which could be used to fund member states’ sovereign needs. But even with agreement from Germany, it would take a year to get such a scheme in place.

Economist Sony Kapoor said the failure of the ministers to agree a credible mechanism to support weak banks in troubled economies is a serious oversight. “The downgrade of several international banks yesterday makes the case for providing a pan-EU backstop for capital and funding support even more urgent.

“Without pan-EU term funding guarantees, the ECB cannot by itself support EU banks that have been shut out of markets.”