On the third anniversary of the collapse of Wall Street's Lehman Brothers, central banks are again riding to the rescue of the world's financial system.
The mission is aimed at propping up European banks, the main victims of the accelerating sovereign debt crisis in countries like Greece and Portugal that has slaughtered the banks' share prices and damaged their ability to raise the funds they need for their operations.
The European Central Bank, the U.S. Federal Reserve and the central banks of England, Switzerland and Japan announced Thursday they will provide unlimited amounts of three-month loans in U.S. dollars to euro zone banks, to ensure they have enough cash for the rest of the year.
The move was prompted by a growing scarcity of loans advanced to the banks by U.S. investment funds and financial institutions amid growing concerns about the health of the euro zone's financial system.
During the Lehman meltdown of 2008, credit markets seized up when banks became reluctant or unwilling to lend money to other banks, for fear the loans would not be repaid. The lack of credit caused upheaval in the global economy, and unemployment moved sharply higher.
While the same thing has not happened in Europe this time, Thursday's move was a clear indication that central bankers are in no mood to risk unleashing a new banking crisis on top of the debt crisis that is already robbing the continent of growth and jobs. ECB president Jean-Claude Trichet had hinted earlier in the week that help was coming, when he said the central banks were "ready to provide liquidity to banks as required."
During the height of the global financial crisis three years ago, central banks slashed interest rates and united globally to inject hundreds of billions of dollars into the financial system to ensure banks had ample cash to meet obligations.
Thursday's announcement of the dollar loans immediately lifted markets and added 10 per cent or more to the share prices of Europe's biggest banks, many of which had lost half or more of their value in the last six months. BNP Paribas, one of the Big Three French banks, rose 13.4 per cent. Italian banking giant Banca Intesa Sanpaolo gained 10.3 per cent.
The only bank among the top 50 European banks to fall was UBS. In Swiss trading, it lost almost 11 per cent after revealing that a $2-billion (U.S.) unauthorized trading loss, possibly the work of a rogue trader who was arrested in London Thursday, may eliminate profits in the third quarter of this year.
Britain's FTSE-100 index and the Eurofirst 300 index of Europe's biggest companies gained more than 2 per cent. The euro climbed more than a cent against the dollar, after hitting a seven-month low on Monday.
Some economists said there are no guarantees the central banks' effort to protect the euro zone's commercial banks will do the trick. "Although it has lifted markets in the short term, the next few days will be telling to see if investors feel that it is more a pre-emptive strike in an attempt to slow down the crisis in the short term, without actually offering a real solution," said David Jones, chief market strategist with Britain's IG Index.
Indeed, other signs suggest the debt crisis is far from over. On Thursday, fiscally strained Spain managed to issue €3.95-billion of bonds, but had to pay a near-record interest rate of 5.16 per cent to lure buyers.
And the economic news in Europe remains discouraging.
The European Commission halved its growth forecast for the 17-country euro zone to 0.2 per cent for the July to September period. The EC expects growth in the last three months of the year to fall to just 0.1 per cent, against its previous forecast of 0.4 per cent, putting the region dangerously close to another recession.
"The soft patch predicted in the spring forecast is now likely to deepen but will not result in a double-dip," said Olli Rehn, the European commissioner for economic affairs. "Hopes that the sovereign debt crisis would gradually fade were disappointed."
International Monetary Fund managing director Christine Lagarde said the global economy faces a crisis of confidence. "Weak growth and weak balance sheets – of governments, financial institutions and households – are feeding negatively on each other," she said Thursday in a speech at the Woodrow Wilson Center in Washington.
"This vicious cycle is gaining momentum and, frankly, it has been exacerbated by policy indecision and political dysfunction."