| |
| |
![]() |
| |
|
| |
|
| |
|
FRANKFURT: The European Central Bank (ECB) moved on Wednesday to make it easier and cheaper for eurozone banks to borrow dollars and Swiss francs, announcing procedural changes that one analyst called "huge."
The measures aimed to reduce the costs of borrowing for three and six months that serve as benchmarks for a wide range of lending to business and individuals.
"This is extremely important because a lot of loans to corporations and to individuals, mortgages for example, are indexed to these kinds of maturities," Bank of America economist Gilles Moec told AFP.
Terming the announcement "huge," Moec said the ECB was trying "to ensure that the interest rate cut last week percolates through the system."
A week ago, the ECB and other central banks in Europe, North America and China unveiled coordinated interest rate cuts in an exceptional effort to boost confidence amid a crisis in the international banking sector.
On Wednesday, the ECB announced a broad series of measures that increased the amount of dollars and Swiss francs available to eurozone banks, eased conditions under which they could borrow funds and reduced pressure on the interest rates they paid for them.
"What we see is no more first aid, but an open-heart surgical operation," commented Sylvain Broyer at the Natixis investment bank.
One change that enlarged the kinds of securities accepted in exchange for the loans would help banks that might be running out of collateral they could use to borrow cash from central banks.
"We heard anecdotal evidence that some credit institutions might not have enough collateral to obtain all the liquidity they wanted," Moec said.
But by lowering the standards on eligible collateral, the ECB did an about-face from a month earlier, when it said it would tighten criteria in light of evidence that some banks might be abusing, or "gaming" the system.
"It clearly raises some issues of credibility loss," Moec said.
But he was impressed by the ECB's decision to take the credit issue by the horns.
The ECB was "doing whatever it takes" to free up interbank lending, he said.
Banks have restricted lending to each other on money markets because loans are not backed up by collateral and if a borrower declares bankruptcy, the lender might never see the money again.
Money markets are critical because they determine the availability of credit for vast numbers of people around the globe, from managers trying to fund their businesses to families and students seeking mortgages and personal loans.
These markets first started to dry up after the US market for high-risk, or sub-prime, mortgages collapsed more than a year ago.
Now, the ECB has extended key changes in short term lending announced previously to the crucial terms of three and six months.
"All longer-term refinancing operations will, until March 2009, be carried out though a fixed-rate tender procedure with full allotment," the ECB said.
Providing unlimited amounts of central bank funds at fixed rates should ease pressure on commercial banks, which it is hoped will use to funds to kick-start lending between themselves and to the wider economy.
The ECB will also start to lend Swiss francs for one-week periods, at fixed rates but not for unlimited amounts.
Among the kinds of collateral now accepted for dollar loans would be instruments denominated in foreign currencies such as dollars, pounds and yen that were issued within the eurozone.
A flat rate of eight percent would be deducted from their value however, in what is called a "hair cut" before the amount of dollars loaned by the ECB was determined.
Other changes meant that financial instruments formerly excluded from ECB operations would now be accepted and that the bank would accept collateral with lower credit ratings than before.
The changes are to remain in force until the end of December, a crunch time when banks have to square their year-end books.
ECB officials also published a timetable of lending operations that extended beyond that period, to March 2009. - AFP/de
|
