World props up banks as EU countdown begins

Agence France-Presse

Posted at Dec 01 2011 07:42 AM | Updated as of Dec 01 2011 07:55 PM

BRUSSELS - World finance received a gigantic shot in the arm Wednesday as central banks announced a massive money-go-round 10 days from a self-imposed EU deadline to beat the debt crisis.

From Washington to Tokyo, in dollars, yen or the crisis-hit euro, the money men decided to flood battered lenders with newly-created cash in a concerted bid to avert a depression and deep social unrest.

But the threat of meltdown weeks from Christmas and dire warnings of conflict returning to Europe left unresolved core issues that will dog EU leaders until they wrap up a pivotal summit next week.

Called to stop the 12-year-old eurozone splitting into 'good' and 'bad' countries, the EU's top economic experts said the bloc itself risks "disintegrating" as its German and French parents battle over wayward offspring.

Euro commissioner Olli Rehn set the hare running as he opened finance ministers' talks with a warning the entire 27-state European Union was now plunged into "a critical period of 10 days to complete and conclude the crisis response."

The problem nearly two years after faked Athens accounts unleashed a public-debt virus now swirling across the northern Mediterranean, is how to reassure markets that eurozone leaders won't just opt to save their own skins.

Stocks and the euro each surged after six central banks -- for the eurozone, the United States, Japan, Britain, Switzerland and Canada -- opened up joint "liquidity support to the global financial system."

They were trying to boost confidence on markets wearied by failure what French Foreign Minister Alain Juppe called an "existential" crisis that risks destroying the border-free Europe built on the rubble of World War II.

At the sharp end, commercial banks are caught holding downgraded and government debt bonds.

Wary of each other, this in turn has raised pressure to reduce lending to businesses -- especially across borders -- and households, thereby choking off economic growth.

The US Federal Reserve and the others said they would make funds available to banks at lower interest rates until February 2013 in order to "mitigate the effects of such strains on the supply of credit to households and businesses."

It's a classic gambit, despite the risk of stoking inflation -- and it echoed similar action in May 2010, when the EU first acknowledged that the Greek drama could destabilise markets the world over.

From US Treasury Secretary Timothy Geithner to Japan's Masaaki Shirakawa the reaction was one of "relief."

But it didn't dispel massive internal troubles the EU must still overcome.

Already bailed-out Ireland's Prime Minister Enda Kenny was just the latest to dispense with niceties about political independence and insist that only answer was for the ECB to stand behind an "effective and credible" bad-debt firewall.

"This problem must be dealt with politically -- and dealt with now," Kenny said in Dublin.

Many others said the same on Wednesday, but until Germany remodels the entire eurozone in its own smart image -- including France, perched on the edge of a humiliating credit downgrade -- Berlin refuses to budge.

Letting the ECB guarantee other euro states' debt represents in Germany a U-turn that could sow the seeds for rampant price rises, the sort it has studiously avoided since the immediate pre-Hitler era.

Strikes and protests already planned gained succour earlier in the day when the EU said eurozone unemployment hit a record 10.3-percent -- joblessness among under-25s in Spain at a breathtaking 48.9 percent.

Lending credence to recent warnings of renewed "war" from Poland, France's foreign minister Alain Juppe said eurozone break-up would trigger "the explosion of the European Union itself."

He added: "We have flattered ourselves for decades that we have eradicated the danger of conflict inside our continent, but let's not be too sure."

Rising government economic consultant Sony Kapoor of Re-Define said the central bankers' "cushion" against trader panic could not obscure the "dark shadow" cast over the world economy.

Amid the calls for the ECB and the International Monetary Fund to come together to save the day, Italy's new Prime Minister Mario Monti insisted that an approach to the latter for bailout loans was "never envisaged."

Rome is under EU orders to shield its public finances with a multi-billion-euro 2012 budget "buffer," which he will unveil on Monday.

Also Italy's acting finance minister, Monti nonetheless faces intense pressure on bond markets over a debt mountain of nearly two trillion euros, amid fears expressed by Rehn's staff of a "run" on the country.

A top source maintained that the Washington-based government lender was "ready" to ride to the rescue provided the ECB came on board.