European shares have risen further, following gains in Asia, as markets continue to react to Thursday’s news of emergency measures by central banks.Frankfurt’s Dax was up 1%, London’s FTSE 100 rose 0.5% and the Cac 40 in Paris added 0.2% in early trading.Earlier, Japan’s Nikkei 225 index had risen 2.3% and South Korea’s Kospi index gained 3.7%.
The central banks are trying to encourage lenders, especially in Europe, to keep lending to each other.The central banks are to provide commercial banks with three additional tranches of loans to help ease funding pressures.There have been fears that credit markets may freeze up, with banks facing billions of dollars of losses as a number of European countries struggle to service their debt obligations.
Europe’s finance ministers are scheduled to meet in Poland on Friday in an attempt to chart out a plan to deal with the debt crisis in the region. They will also be joined by US Treasury Secretary Timothy Geithner.Greece is the current focus of investor concern, and there are growing fears that the country may default on its bonds.This has made European banks reluctant to lend to each other, creating the risk of short-term funding problems for those most exposed.Peter Cardillo of Rockwell Global Capital said the move by central banks hoped to “convince the market that the euro is here to stay, euro land is not going to disintegrate and Greece is probably going to avoid a default”.Following the news of the central bank co-operation, the euro rose more than 1% against the US dollar, and the price of crude oil gained on optimism global economic growth would help boost demand.
At the same time, the price of gold dropped as investors shifted away from an asset that is seen as giving them protection against global risks. The price of gold has surged in recent months, and many investors are wary about the outlook for further gains.The five central banks involved in the market co-operation are the US Federal Reserve, the Bank of England, the European Central Bank, the Bank of Japan and the Swiss National Bank.The new loans are being issued in dollars, because European banks can already access additional euro funds from the European Central Bank.
The three additional three-month loan offers will be conducted in October, November and December.There have been concerns that a credit crunch in the markets would hurt companies and consumers.”Increasingly I think international banks outside of Europe are questioning the counter-party risks involved with lending to European banks,” Rajiv Biswas of IHS Global Insight told the BBC’s Asia Business Report.
Mr Biswas added that given the current situation, the move by the central banks could not have come soon enough.”I think this step was very important in avoiding the kind of problems we saw in 2008, when we had that terrible crunch in credit markets, which really was a major negative factor for the global economic outlook,” he added.US Treasury Secretary Geithner will join his European counterparts on Friday for talks amid fears that the sovereign debt crisis coupled with economic problems in the US may slow global growth.Analysts said that while the latest move by the central banks had allayed those fears for now, until a long-term solution to those issues was found markets were likely to remain volatile.
“Obviously it’s not a long-term solution, we need to see some resolution to the sovereign debt issue to give markets confidence [that] we’ll have stronger growth over the medium-term,” said Spiros Papadopoulos of National Australia Bank.Tony Nunan of Mitsubishi Corp added that the co-ordinated action by the central banks had only managed to delay the inevitable.”We are still nowhere near out of the woods. They are just barely keeping the economy from falling off a cliff, but there is no structural solution to the European sovereign debt problem.” – BBC