The Federal Reserve and other major central banks put themselves in position to flood the international financial system with U.S. dollars, a sign of resolve meant to keep doubt about the European economy from turning into a global crisis of confidence.
Allies rallied to the side of European governments and the European Central Bank, who announced unprecedented measures aimed to protecting the euro and bonds of countries such as Portugal and Spain from what the Swedish finance minister on Sunday called a “wolf pack” of speculators.
The Frankfurt-based ECB said in a statement that it would intervene in government and private debt markets to stabilize interest rates, something the central bank has never done. The ECB’s announcement came on the heels of a press conference in Brussels, where finance ministers from the European Union pledged a financial backstop worth the equivalent of almost $1-trillion (U.S.).
“We are placing considerable sums in the interests of stability in Europe,” Spanish Economy minister Elena Salgado told reporters after chairing the meeting, according to a report by Bloomberg News.
The massive response to strains in global financial markets that had observers harking back to the collapse of Lehman Brothers Holdings Inc. in the autumn of 2008. The euro ended last week at its lowest in 14 years, with bets on its decline at a record high.
Criticism of European policy makers slow resolution of the Greece debt crisis went beyond investors and economists, as non-European officials, including U.S. President Barack Obama, called on European governments to get the situation in hand.
“The size is pretty impressive,” said Mark Chandler, a fixed-income analyst at RBC Capital Markets in Toronto. “The part that will really surprise people is the ECB is participating in outright purchases,” Mr. Chandler added, noting the ECB President Jean-Claude Trichet only a few days ago appeared to dismiss the idea.
The Fed established “swap lines” with the ECB, the Bank of England, the Bank of Canada and the Swiss National Bank, re-establishing a crisis-fighting tool that was allowed to end earlier this year as market conditions normalized amid evidence of rebound from global recession. (The Bank of Japan was also expected to join the program).
But toward the end of last week, there was evidence that banks were once again reluctant to lend, in part because of uncertainty about lenders’ exposure to Greece and other debt-burden European nations.
The ECB said in a statement that it would trigger its swap line with the Fed this week. The Bank of Canada made clear in a press release that its participation is precautionary.
This agreement provides the Bank of Canada with flexibility to address rapidly evolving developments in financial markets,” the central bank said. “The Bank judges that it is not necessary for it to draw on this swap facility at this time, but that it is prudent to have the agreement in place.”
The euro rose on the news, and stock markets in Asia gained.
Under the loan package agreed in Brussels, euro-area governments pledged to make 440-billion euros available, with 60-billion euros more from the EU’s budget and as much as 250-billion euros from the International Monetary Fund, Ms. Salgado said. In dollars, that’s a combined total of about $964-billion.
That initial awe could wane as investors get a closer look at details that remained fuzzy, or if domestic politics interrupts the granting of aid, Mr. Chandler said.
“The markets are still going to be on tenterhooks because you need evidence that the national governments are going to back this,” Mr. Chandler said.
The Group of Seven finance ministers and central bank governors, who consulted at least twice by conference call since Friday, sought to assuage those doubts, putting the weight of governments that control about two thirds of the world economy behind the European efforts.
“Together these measures will make a strong contribution to financial stability, and we will continue to work together to support stability, recovery and growth,” the G7 said in a statement.
