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FRANKFURT - Central banks in Europe fired on Monday a new broadside to free up frozen lending, by providing commercial banks with unlimited amounts of dollars in a joint operation that might be reinforced by their key Japanese ally.
The Bank of England, European Central Bank and Swiss National Bank will loan dollars to commercial banks for periods of seven, 28 and 84 days "at fixed interest rates for full allotment," an ECB statement said.
"The Bank of Japan will be considering the introduction of similar measures," it added.
The decision was part of a fresh push by the central banks in Europe along with the US Federal Reserve and Bank of Japan to ensure the flow of dollars through stressed credit markets.
Banks worldwide need the US currency to finance operations, but the market on which they would normally borrow it has seized up amid extreme tension that erupted when the US sub-prime mortgage market collapsed over a year ago.
By providing unlimited amounts of dollars to commercial banks, also known as counterparties, the banks aimed "to improve liquidity in short-term US dollar funding markets," the statement said.
"Counterparties in these operations will be able to borrow any amount they wish against the appropriate collateral in each jurisdiction," the ECB said.
A fixed rate for the loans will be set in advance and applied by each central bank.
Bank authorities "will continue to work together and are prepared to take whatever measures are necessary to provide sufficient liquidity in short-term funding markets," the ECB added.
Last week, central banks in Europe and North America made an exceptional coordinated interest rate cut, to which the Chinese National Bank added one of its own, and along with the Bank of Japan they have been providing huge amounts of cash to stressed interbank markets.
Those markets froze when the international financial crisis made banks wary of lending to each other because they could not be sure borrowers would be able to pay back the loans.
The crisis worsened in mid September when US investment bank Lehman Brothers declared bankruptcy.
Financial markets went into a tailspin and rumours began to circulate about other potential failures, forcing governments in Europe and North America to step in, buying stakes in some banks or brokering and backing rescue packages or takeovers in others.
Britain announced last week a comprehensive bank rescue plan that appears to be setting the standard for Europe and the United States.
Meanwhile, however, Iceland has been forced to bail out its leading banks, a debacle that has put the country itself in financial peril.
Germany, France and Italy were expected to unveil on Monday funds that would likely total tens of billions of euros to prop up their banking sectors.
If the plans follow the British model, they would pump cash into banks in return for shares owned by the state, a partial nationalisation, along with broad guarantees for new bank debt through the coming year.
"After a haphazard start, Europe is finally getting its act together," Bank of America senior economist Holger Schmieding said Monday in a research note entitled "European Crisis Management: We Are All British Now."
That referred to a headline by the French daily Le Monde following the September 11 2001 attacks on the United States which had said: "We Are All Americans Now."
- AFP/ir
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