ECB lends dollars to eurozone banks amid fears over debt

15 Sep 2011

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For only the second time in six months the European Central Bank recently provided US dollar loans to euro-zone banks.  Meanwhile the dependence of Spanish banks on the ECB for daily funding needs increased, fueling fears that Europe's debt woes could lead to a credit crisis and pushing the euro bloc back into recession.

The reports came as Moody's Investors Service downgrade hit the ratings of two French banks. According to analysts, this was an indication that the debt crisis that started nearly two years ago in Greece now threatened some of the region's largest economies.

They said, a loss of confidence among consumers and businesses might result from the mix of growth-draining fiscal belt-tightening. Also there would be fears of  financing costs going up in parts of Europe leading to a 0.5 per cent contraction in output next year and a further 1 per cent slide in 2013.

The ECB also came under pressure on the legal front with the UK Treasury saying it had initiated court proceedings against the ECB over the bank's policy to stop UK-based clearinghouses dealing with some euro-denominated financial products. According to the ECB's recently published "location policy" all major clearers of purely euro-denominated transactions would need to be based in the euro zone.

The legal action comes as the first by an EU member state against the ECB.

The ECB said yesterday that it allotted $575 million at its seven-day dollar auction. The bank makes the funds available through an arrangement with the US Federal was extended until August 2012.

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