London/Frankfurt - Britain orchestrated this week's bold
move by central banks to stave off a cash crunch in global markets, helping
drive a plan that began to take shape about 10 days ago.
For months, central bankers have tracked with growing
concern how the deleveraging among European banks, hurt by the tumbling value
of eurozone debt, was hurting global funding as banks sold off assets and
brought cash back home.
Indeed, some central banks had urged the US Federal Reserve
for some months to put in place cheaper dollar funding, but the Fed had
resisted, said a source with direct knowledge of this week's deal.
Last week, conditions grew particularly acute after a German
bond auction failed to attract enough buyers. The Federal Reserve and the
European Central Bank (ECB) started serious discussions around the middle of
last week, banking officials in Europe and the United States told Reuters.
Bank of England governor Mervyn King said he called the
meetings that led to the decision by six of the world's major central banks to
cut dollar funding rates to keep money flowing through global financial
arteries.
"It was the result of conversations which I initiated
as chairman of what used to be known as the G10 governors, now the economic
consultative committee, among a limited number of central banks," he told
a news conference in London on Thursday.
The decision by the US Federal Reserve, the ECB and the
central banks of Japan, Canada, Britain and Switzerland to provide cheaper
dollar funding for banks eased credit strains and provided a fillip to market
sentiment.
Short-term funding costs eased on Thursday for the first
time since July 22, when the latest phase of the eurozone crisis took hold
after European Union leaders failed to lay out detailed plans for a strong
bailout fund.
Several banking officials said there was no specific trigger
for the action, and specifically denied rumours that a European bank was on the
brink of collapse. Instead, they characterised the action as the culmination of
many weeks of worry as financial strains had built.
"Non-Europeans are not just complaining about the lack
of action by Europeans but starting to feel more strongly that Europe can't
contain this problem by itself," said a source briefed on the central bank
discussions. "That sense might have led to this swap deal."
Even emerging markets, notably Eastern Europe and Asia, were
feeling the pinch as European banks pulled back lending operations and put
assets on the block, two banking officials said. Local banks that took up the
slack had less access to dollar funding for their clients, bank officials said.
In the announcement, the six central banks said they were
also ready to make money available in currencies other than their own, if
necessary.
"They wanted to ensure that a dollar crunch did not brake economies in Asia, in the United States," said Austrian Finance Minister Maria Fekter.
Fraternity
Central bank officials from leading economies are in
constant contact. They have cemented close relationships at the face-to-face
meetings they hold every couple of months in Basel to exchange intelligence on
financial markets and the economy.
After the ECB and the Fed discussed conditions last week,
the Fed's policy panel held a video conference on Monday and agreed to cut the
interest rate on its dollar swap lines.
Another source said provisional agreement was reached in a
teleconference at the start of last week, and that by the end of the week,
details had been agreed and the date of November 30 set for the announcement.
It wasn't the first time central banks, including the Bank
of Japan and the ECB, had approached the Fed about a cheaper dollar swap, a
source said.
"Other central banks have been urging the Fed to put
this arrangement in place for some time but Fed didn't say 'yes up till
now," said the source, who has direct knowledge of the arrangement.
"The Fed said 'yes' this time probably because the
eurozone crisis developed into a global problem."
The ECB has been watching the creeping credit freeze with
growing alarm for more than half a year but its interventions - lending banks
in the eurozone half a trillion euros - have failed to defeat fears they could
be sucked under by the region's sovereign debt crisis.
Two years into Europe's crisis, investors are fleeing the
eurozone bond market, European banks are dumping government debt, deposits are
draining from southern European banks and a looming recession is fueling doubts
about the euro's survival.
Fed officials have been quick to point out that the cheaper
dollar swap lines, intended to ensure banks outside the United States have
ready access to dollars, are not intended to bail out Europe - but to help
shore up economic growth.
"There is not so much leverage out there in the market
right now, so if we do see the banking system freezing up, you might not see
much forced selling, but it would impact the global economy in a very big
way," said Kathleen Gaffney of Loomis Sayles, a part of Natixis Asset
Management.
European retreat
With dollar funding strains compounded by regulatory
pressure, European banks have preferred to shore up balance sheets rather than
fork out for dollar funding.
But most large banks also have dollar assets and
liabilities. With interbank rates rising as concerns grow about the funding
ability of counterparties, European banks have been effectively cut out of
dollar markets.
This has already prompted some European banks to dispose of
US-denominated assets - and sparked concerns that trade with the United States
could be at risk.
Andrew Cole, investment director at Baring Asset Management,
said the so-called TED spread - the difference between interest rates on
interbank loans and short-term government bills - had been flashing warning
signals.
"This is still a long way from the very high levels
seen when Lehman Brothers failed, but has been moving steadily higher in recent
months and is indicative of the concern about bank credit ratings, which has
been impeding both interbank lending and lending in the wider economy,"
Cole said.
The crisis has already prompted European banks to halt
lending and start selling assets. But they are particularly keen to dispose of
assets in US dollars, where funding is most tight, seeing them pull back in
areas like project finance, shipping finance, aviation and infrastructure.
For banks with big US operations, or which tend to lend for
projects denominated in dollars, like the French banks, this has been a
particular problem. Dollar funds have been made available via the ECB, but they
are expensive and tapping the central bank carries stigma.
The funding crunch in Europe is far greater than simply a
dollar issue, however, as banks in Europe's crisis hotspots such as Greece have
found themselves shut out of the interbank market needed to fund their
day-to-day operations.
Even getting access to backstop funding options, such as ECB
funding facilities, is becoming a problem as banks fret about running out of
eligible securities they can use to tap these, or collateral. Banks are busy
hoarding what securities they can to cash in at the ECB.
"This is Lehmans, take two. Cubed," said Gaffney.