Fears of a deepening of Europe's debt crisis have prompted the world's leading central banks to pump US dollars into the financial system, in a co-ordinated action designed to boost market confidence. The Bank of England joined the US Federal Reserve, the European Central Bank, the Swiss National Bank and the Bank of Japan on Thursday to announce that they would flood money markets with dollars over the coming months
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Amid the deepening euro-zone crisis, Moody's downgraded the credit rating of both Société Générale and Crédit Agricole, two of France's largest banks, over concerns that they hold insufficient capital to withstand a Greek default. BNP Paribas, France's biggest bank, denied reports that it was having trouble raising funds in the markets. French officials insisted that the country's financial sector was sound and did not need a further injection of capital from the government.
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The action addresses an acute shortage of dollar availability as U.S. lenders withhold funds out of concern that the European banking system is overexposed to the region's government-debt crisis.
The tenders appear aimed above all at ensuring that European banks retain access to dollar funding after months in which private-sector investors have refused to roll over existing credits. In the new tenders, banks bidding, say, at the ECB for funds will receive dollars. But the Fed's actual counterparty will be the ECB, not the banks that use the facility, reducing the risks of the transaction for the Fed.
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European Central Bank headquarters in Frankfurt.
.The euro surged by more than 1% against the dollar and the yen following the central banks' move.
European equity markets also shot higher, led by shares of French banks, which have been tangled in the crosshairs of the continuing European sovereign-debt crisis over their exposure to Greece's debt. BNP Paribas SA shares traded 15% higher, while Crédit Agricole SA was up 8% and Société Générale SA was 7.4% higher.
BNP Paribas and Société Générale have acknowledged that access to dollars through U.S. money-market funds has been drying up, and both have said they have secured alternative sources of dollars. They have also cut back on dollar-denominated lending and sought to sell assets in a bid to bolster their capital, marking a potentially worrying development for a slowing economy in France and elsewhere.
Prices of German bunds and U.K. gilts fell sharply as risk sentiment got a lift from the market. The December bund-futures contract fell 151 ticks to 135.36, while the December gilt futures contract plunged by 145 ticks to 128.70.
"It's obvious the ECB is working hard to get ahead of the market's skittishness about funding availability, and the markets are responding accordingly as earlier losses in safe-haven assets are extending with risk assets surging," said Adrian Miller, senior vice president of fixed-income strategy at Miller Tabak Roberts Securities.
The new dollar tenders, under which banks will be able to bid for unlimited funds, will have a maturity of about three months, covering the end of the year, the ECB said. They will be conducted in addition to the bank's regular funding operations. The tender dates will be Oct. 12, Nov. 9 and Dec. 7, the ECB said.
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