EU bids to prop up banks as US urges rapid action

The European Central Bank yesterday announced new measures to provide cash-strapped banks with liquidity as US President Barack Obama stressed Europe must act quickly on its ongoing debt crisis.

Markets cheered the news the ECB would beef up “non-standard” action to help out lenders as the European Commission called for “coordinated action” to recapitalise banks and Germany said it should be done without delay.

European equity markets were up more than three percent as hopes grew that political leaders were finally getting to grips with the crisis.

While ECB chief Jean-Claude Trichet stopped short of cutting rates at the last meeting of his eight-year term, he said the bank would continue to assist lenders although he also urged them to bolster their balance sheets.

The ECB “urges banks to do all that is necessary to reinforce balance sheets (and governments) ... need to take decisive and front-loaded action to bolster public confidence in the sustainability of government finances,” said Mr Trichet.

The Bank of England also took bold steps to reinvigorate the sluggish British economy, reinstituting its quantitative easing (QE) policy – whereby it pumps cash directly into the system to boost activity.

The BoE voted in favour of increasing its QE policy by £75 billion (86 billion euros, $115 billion) to £275 billion over a four-month period while keeping its main interest rate at a record-low 0.50 per cent.

Earlier yesterday, European Commission President José Manuel Barroso said: “We are now proposing to the member states to have a coordinated action to recapitalise banks and get rid of toxic assets they may have”.

Speaking to Euronews TV, Mr Barroso urged action to clear up what he termed a “real mess” in the eurozone.

While Europeans scrambled to reasssure investors that the continent’s banks were safe, Mr Obama reiterated his warning that a failure to tackle the crisis in Europe would quickly spread.

“Our economy really needs a jolt right now. The problems Europe is having today could have a very real effect on our economy at a time when it’s already fragile,” Mr Obama told a White House news conference.

Europeans “have got to act fast,” he added.

“We have got a G20 meeting coming up in November. My strong hope is that by the time of that G20 meeting, that they have a very clear concrete plan of action that is sufficient to the task.”

In Berlin, Chancellor Angela Merkel insisted banks should be recapitalised without delay, if needed.

“I think there would be a very clear need (to recapitalise) because this is money that is safely invested ... I don’t think we should hesitate,” Ms Merkel said.

There would be “far greater damage” if banks needed to be rescued by governments, she said, adding: “But the first step is for banks to recapitalise themselves.”

As if to emphasise the urgency of the task facing Europe, the NYSE Euronext stock exchange suspended trading in the shares of the under-fire Franco-Belgian bank Dexia at the request of the Belgian market regulator.

Trading in the stock was halted at 1359 GMT during a session in which it had fallen 17.24 per cent to €0.85 per share as the French and Belgian governments put together a rescue package for the lender.The European Banking Authority is readying an audit of the strength of the continent’s main banks, assuming they would have to take large losses from their holdings of bonds issued by weak eurozone member states, especially Greece.