World's Central Banks Flood Market with Dollars
September 15, 2011
Los Angeles Times
Five of the world's top central banks moved jointly Thursday to provide unlimited dollar loans to banks, boosting confidence in the eurozone's financial sector, which had been targeted for days by investors worried about banks' exposure to the debt crisis.
The European Central Bank said it will coordinate with the U.S. Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank to offer three-month dollar loans to banks through the end of this year.
The move is an effort to prevent Europe's debt crisis from derailing the global economy's rebound from recession. Banks have seen their shares sink recently on fears they were having trouble getting short-term loans from each other because of fears they were exposed to huge losses from Greece government bonds and other troubled eurozone countries.
When a bank is rumored to be in danger of suffering large losses, other banks will stop lending to it for fear of not getting their money back -- a scenario that created the global credit crunch in 2008. Ultimately, the threat to the wider global economy is that banks will stop lending to businesses, stifling growth.
Stock markets and the euro rallied Thursday on hopes the dollar loans will relieve the funding pressures.
The program will likely prevent a panic for the next few months, but it's only first step, said Mark McCormick, currency strategist at Brown Brothers Harriman.
"You're warding off contagion and crisis, but it's not going to solve the problem, which is too much debt," McCormick said. He said it was smart for the central banks to address the problem early. Indicators of banking stress are the worst now in three years, he said, but remain better than they were before Lehman Brothers failed exactly three years ago, on Sept. 15, 2008.
Financial markets have been hugely volatile for weeks on fears that Europe's debt crisis will spin out of control and threaten Europe's banking sector. Moody's this week downgraded two major French banks on those concerns.
McCormick said long-term impact of Thursday's move was uncertain.
"I think a lot of people took it as a red flag, but it's more of a pre-emptive strike to get ahead of the stresses that we had when Lehman failed," he said.
Markets and the euro currency, which were already higher on the day, were buoyed by the news. The 17-nation currency surged to a daily high of $1.3934 before retreating slightly to $1.3887.
Shares in French bank BNP Paribas in Paris jumped 11.3 percent while Societe Generale gained 5.4 percent. Traders had singled them out in recent days as being particularly exposed to the bad debt of Greece.
The ECB said in its statement that the tenders will be conducted in October, November and December.
The central banks had previously used such tenders to supply banks with liquidity during the credit crunch. The U.S. Federal Reserve in 2010 reopened a program to ship billions of dollars overseas in a bid to pump more short-term cash into the financial system and make sure banks have the dollars they need.
Copyright © 2011, Los Angeles Times
September 15, 2011
Los Angeles Times
Five of the world's top central banks moved jointly Thursday to provide unlimited dollar loans to banks, boosting confidence in the eurozone's financial sector, which had been targeted for days by investors worried about banks' exposure to the debt crisis.
The European Central Bank said it will coordinate with the U.S. Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank to offer three-month dollar loans to banks through the end of this year.
The move is an effort to prevent Europe's debt crisis from derailing the global economy's rebound from recession. Banks have seen their shares sink recently on fears they were having trouble getting short-term loans from each other because of fears they were exposed to huge losses from Greece government bonds and other troubled eurozone countries.
When a bank is rumored to be in danger of suffering large losses, other banks will stop lending to it for fear of not getting their money back -- a scenario that created the global credit crunch in 2008. Ultimately, the threat to the wider global economy is that banks will stop lending to businesses, stifling growth.
Stock markets and the euro rallied Thursday on hopes the dollar loans will relieve the funding pressures.
The program will likely prevent a panic for the next few months, but it's only first step, said Mark McCormick, currency strategist at Brown Brothers Harriman.
"You're warding off contagion and crisis, but it's not going to solve the problem, which is too much debt," McCormick said. He said it was smart for the central banks to address the problem early. Indicators of banking stress are the worst now in three years, he said, but remain better than they were before Lehman Brothers failed exactly three years ago, on Sept. 15, 2008.
Financial markets have been hugely volatile for weeks on fears that Europe's debt crisis will spin out of control and threaten Europe's banking sector. Moody's this week downgraded two major French banks on those concerns.
McCormick said long-term impact of Thursday's move was uncertain.
"I think a lot of people took it as a red flag, but it's more of a pre-emptive strike to get ahead of the stresses that we had when Lehman failed," he said.
Markets and the euro currency, which were already higher on the day, were buoyed by the news. The 17-nation currency surged to a daily high of $1.3934 before retreating slightly to $1.3887.
Shares in French bank BNP Paribas in Paris jumped 11.3 percent while Societe Generale gained 5.4 percent. Traders had singled them out in recent days as being particularly exposed to the bad debt of Greece.
The ECB said in its statement that the tenders will be conducted in October, November and December.
The central banks had previously used such tenders to supply banks with liquidity during the credit crunch. The U.S. Federal Reserve in 2010 reopened a program to ship billions of dollars overseas in a bid to pump more short-term cash into the financial system and make sure banks have the dollars they need.
Copyright © 2011, Los Angeles Times