Whether it was a major European bank on the brink of failure, or that the cost of swapping euros for dollars rose to its highest level in three years yesterday, the Federal Reserve, the Bank of England, European Central Bank, the Bank of Japan, the Swiss National Bank, and the Bank of Canada in reportedly a coordinated action moved to provide liquidity to the global financial system, by way of lowering the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points.
As a contingency measure, these central banks have also agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant. At present, there is no need to offer liquidity in non-domestic currencies other than the U.S. dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise. These swap lines are authorized through February 1, 2013.
The ECB also lowered the margin requirement for 3-month dollar operations from 20% to 12%.
Steve Goldstein writes for MarketWatch that there is nothing coordinated about it.
It’s only coordinated in the sense that the Federal Reserve is printing the dollars and the European Central Bank and other central banks put the greenbacks in the virtual vaults of mangled commercial banks that are drowning in European debt.
Of course none of this cheap printing and swapping will make the Euro debt crisis go away. European banks are loaded with sovereign debt worth a fraction of what it’s carried on their books for. (Sound familiar?). And, with these banks levered from 15 to 1, and in some cases 30 to 1, there was no room for error.
Back in 1884 there was a financial crisis that was, “triggered by an overflow of gold abroad, as foreigners began to lose confidence in the willingness of the United States to remain on the gold standard.” As Jim Grant describes, the crisis was “the real McCoy — ‘the wildest kind of panic raged, and securities were thrown overboard regardless of price.’”
In those days there was no Federal Reserve, no lender of last resort, no central bank (or multiple central banks) to flood the market with liquidity and cheap credit. So, left to the market, the overnight money rate rose to 4% — per day! (That’s a higher rate than your local payday-loan store offers these days) But the crisis only lasted three weeks, writes Elmus Wicker in Banking Panics of the Gilded Age.
The current crisis? Three years and counting.