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Liquidity fix not enough for Europe: investors

Sep 15, 2011, 3:14 p.m.

NEW YORK (Reuters) - Troubled euro zone banks probably need more aggressive capital injections to get through turmoil caused by Europe's worsening debt crisis, top investors said at a Bloomberg Markets 50 Summit on Thursday.

The European Central Bank said on Thursday it, alongside other major central banks, would hold three separate dollar liquidity operations between October and December to help see banks through the year-end.

Some European banks have had trouble accessing short-term loans to fund operations because investors fear they are too heavily exposed to government debt from troubled euro zone countries such as Greece.

John Taylor, founder and chairman of FX Concepts, the largest currency hedge fund with $8 billion in assets, said temporary measures are not enough to help euro zone banks.

The ECB announcement "certainly doesn't get at any of major problems."

Dino Kos, managing director at Hamiltonian Associates, agreed, saying euro zone banks need a plan similar to the U.S. Troubled Asset Relief Program to boost bank capital. "There has to be some mechanism to inject capital into banks," he said.

Fear that Greece may default on its debt has driven up the borrowing costs of several peripheral euro zone states with high debt burdens and low rates of growth, including Italy and Spain. That has put the focus on banks that hold large amounts of debt from those countries.

European authorities have been at odds over how to address a worsening debt crisis, with German Chancellor Angela Merkel bluntly rejecting common euro zone bonds as a solution.

The European Union's top economic official said on Thursday he expected international lenders to sign off on a vital tranche of aid to Greece by the end of the month. That should tide the country over until it gets a second bailout package from the euro zone.

But investors fear Greece still will struggle to pay its debts, particularly since it has been pushed by European leaders to adopt a severe austerity plan of tax hikes and spending cuts that will keep it stuck in a deep recession.

Kos said Greece would probably have to exit the euro zone if it were to default.

Taylor called the mix of tight monetary policy -- euro zone interest rates are considerably higher than those in other weak developed economies such as the United States and Japan -- and fiscal austerity "a horrendous cocktail" and said investors should avoid exposure to euro.

The euro hit a seven-month low beneath $1.35 earlier this week.

David Blanchflower, a former member of the Bank of England's monetary policy committee who now teaches economics at Dartmouth College in Hanover, New Hampshire, said tight ECB monetary policy has left "the credibility of that institution in tatters."

ECB President Jean-Claude Trichet signaled earlier this month that the central bank could cut interest rates at its next policy meeting.

(Reporting by Steven C. Johnson; Editing by Padraic Cassidy)

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