Credit move lifts markets but ‘isn’t an easy answer’

By Peter Ranscombe
Published on 01/12/2011 00:00

ANALYSTS last night warned that the eurozone debt crisis “isn’t going to just go away” after six of the world’s central banks came together in an effort to unlock credit markets.

Shares around the globe surged after the concerted efforts to make it easier for banks to buy dollars and lend money to each other and to cash-strapped businesses.

The dollar is the main currency for the inter-bank lending market, which has frozen up in recent weeks amid mounting concerns about the eurozone debt crisis and the United States’ inability to agree budget cuts.

The move echoes steps taken following the collapse of investment bank Lehman Brothers in 2008 as policymakers race to avoid a second financial crisis.

On Wall Street, the Dow surged almost 500 points, its biggest rise since March 2009, and stock markets across Europe climbed higher. In London, the FTSE 100 rose 3.2 per cent while Germany’s Dax leapt 5 per cent and France’s Cac-40 4.2 per cent.

Banks were among the big winners, with Royal Bank of Scotland gaining 7.5 per cent and Lloyds Banking Group surging 7.1 per cent, as financial stocks shrugged off a sector-wide credit ratings downgrade on Tuesday night from Standard & Poor’s.

Marc Ostwald, markets strategist at Monument Securities, said: “Financial markets are cynical beings, happiest when central banks appear to offer a form of comfort that suggests they will always be there to save markets from themselves.”

But Andy Scott, an account manager at currency specialist HiFX, warned that the eurozone wasn’t out of the woods yet.

“Many have been quick to point out the crux of the matter is still unresolved; who will put forward the money to support the bigger debtor nations of southern Europe?” he said.

“Assuming the eurozone leaders do finally come up with enough money to support Italy, Spain and any other member that needs it, we still see problems ahead for the euro.”

Ssterling rose as expected against the dollar following the action by the Bank of England, the European Central Bank (ECB), the America’s Federal Reserve and the central banks in China, Japan and Switzerland.

The euro was also higher against the pound and the dollar, but traders said that the rises for the single currency were unlikely to last.

Tuesday night’s meeting of eurozone finance ministers in Brussels produced “some progress” on plans for the European Financial Stability Facility (EFSF) but analysts said more details were needed to reassure markets.

Richard Driver, a currency analyst at Caxton FX, said: “The agreement that the EFSF will guarantee up to 30 per cent of new bond issues from the eurozone’s struggling nations is a positive but this simply isn’t enough. The market is still looking for the ‘bazooka’ measure that is really going to get to the heart of the debt crisis.

“Eventually, we really need to be seeing greater fiscal integration through a common eurozone bond; this is the only silver bullet solution we can identify.”

DailyFX currency analyst David Song added: “The lack of details in leveraging the EFSF has dampened hopes of seeing a major push to strengthen the financial system.”

The ECB is now expected to cut interest rates again when policymakers meet next week.