World's central banks help lenders as EU growth stalls

BRUSSELS: The eurozone's runaway debt crisis is bringing growth to a standstill, the EU warned Thursday as finance ministers headed to key talks and central banks rode to the rescue of cash-starved private lenders.

The European Central Bank, along with its US, Japanese, Swiss and British counterparts, announced they would act in concert to inject extra dollar liquidity into banks facing a shortage of the US currency.

The announcement sparked a European stock market rally, with bank shares rebounding after falling in recent days as their usual sources of dollars dried up on concerns they might be hit by a Greek debt default.

The ECB said the central banks will "conduct three US dollar liquidity-providing operations with a maturity of approximately three months covering the end of the year" -- instead of the usual seven-day operations.

Their action followed a gloomy economic report from the European Commission.

EU Economic Affairs Commissioner Olli Rehn said the economy was set to come to a "virtual standstill" in the second half of the year, but he assured that Europe would avoid another recession.

"The outlook for the European economy has deteriorated," Rehn told a news conference releasing the interim economic report. "We are expecting a stalling of economic growth but not a recession."

Although the growth forecast for 2011 remained at 1.6 percent, it will slow to 0.2 percent in the third quarter and a mere 0.1 percent in the final three months of the year, worse than previously thought.

"The sovereign debt crisis has worsened, and the financial market turmoil is set to dampen the real economy," Rehn said.

The European Commission said weakening global demand and trade over the summer, and signs that the recovery lost steam in the United States, also contributed to Europe's economic slowdown.

EU finance ministers meet in Wroclaw, Poland, for dinner on Thursday ahead of two days of talks centred on a new Greek rescue package that was agreed by eurozone leaders in July but has yet to be implemented.

Highlighting deep concerns over the crisis' global impact, US Treasury Secretary Timothy Geithner will join his EU counterparts in Poland on Friday to deliver a rare address by an outsider.

In Washington, IMF chief Christine Lagarde pressed US and European leaders to take bolder action to rescue their economies, warning that indecision and "political dysfunction" was pushing them back to recession.

The developed economies have entered a "dangerous new phase" worsened by feeble political leadership, with deepening uncertainty over the most heavily indebted governments, Europe's banks, and US households, she said.

"If the advanced economies succumb to recession, the emerging markets will not escape. Nobody will," Lagarde said.

With markets convinced that Athens was headed towards default, French President Nicolas Sarkozy and German Chancellor Angela Merkel insisted Wednesday that Greece belonged in the eurozone.

In a three-way call with the French and German leaders, Greek Prime Minister George Papandreou promised to apply overdue measures required of Greece in return for the next slice of rescue money.

Rehn said he expected auditors from the EU, IMF and European Central Bank to complete their review of Greece's budget measures by the end of September, which could pave the way for Athens to receive the next installment of a 110-billion-euro ($151 billion)bailout it was granted last year.

Without the eight billion euros in funding Athens will run out of cash next month.

A new 159-billion-euro lifeline also hangs in the balance and will be at the centre of talks in Poland.

Sarkozy and Merkel stressed in a statement that "now more than ever it is indispensable" to implement the measures agreed at the July 21 eurozone summit aimed at stabilising the eurozone.

Finance ministers will also consider a compromise deal reached with the European Parliament aimed at toughening the EU's deficit and debt rules, long ignored by governments.

But divisions remained between EU states over the idea of issuing unified eurozone bonds.

The European Commission said it would soon present options for such "eurobonds," but with German Chancellor Angela Merkel repeated her opposition on Thursday, calling them an "absurdity."

Market analysts argue that eurobonds could be a quick way to resolve the debt crisis because they would level out interest rates across the single currency area, and keep weak countries in the bond market.

Germany enjoys the lowest interest rates thanks to its healthy budget and economy. And its growth prospects, according to the commission's report, improved to 2.9 percent for 2011.

The forecast, however, worsened in Italy (from 1.0 percent in a previous forecast to 0.7 percent), France (from 1.8 percent to 1.6 percent) and the Netherlands (from 1.9 percent to 1.7 percent), the report showed.

Copyright AFP (Agence France-Presse), 2010