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.
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It looks like the move provides precisely the wrong incentives to precisely the worst institutions.
Time to email my gold merchant again.
Thanks for the E-dollars boys but as I am sure you know, it’s just like giving a drunk more booze to avoid the hangover, which we all know will just be worse the more drink we get.
Greece is only one of the members of the Euro, why don’t they just:
(1) Buy a bank outright (assuming they don’t own one already)
(2) Replace the management with cronies
(3) Direct the bank to buy all newly issued Greek government bonds
(4) Use 10% (or whatever the ECB capital reserve requirement is) of the bond sale proceeds to buy more capital stock of the bank
(5) Deposit 5% (or whatever the ECB fractional reserve ratio is) of the Greek bonds with the ECB
Repeat (3) to (5) until Euro explodes
Yes it is completely immoral and would dump Greek debt monetization inflation across the whole Eurozone, but what’s stopping them?
Do not engage in superficial thinking on this. Remember there is a huge difference between 1884 and our current situation and it is a little thing called the gold standard. Today we are on floating currencies and that makes the situation a lot different.
This is damage control and kicking the can a little farther down the road, but it does expose the FED in a way I am not very comfortable with. A friend set this in perspective. I quote him below.
“…Currency swap lines do not solve any solvency problem…they are not inflationary…the Fed has no immediate currency risk in a swap and it has no credit risk. Accommodation anticipates a run out of euros into dollars. The risk to the Fed is that the ECB would default on its repurchase contract and the Fed would be stuck with worthless Euro’s.
“I read the move as planning for catastrophe…a stagey of preparing to amortize catastrophe as long as possible to give banks some chance of dumping sovereign debt and reducing inevitable carnage. The mechanism addresses problems that CLS and BIS would have in overnight clearing where some banks might not meet liquidity reserves for clearing transactions without the ability to get dollars from the ECB…they will pledge questionable sovereign debt for dollar loans from the ECB in order to clear overnight transactions avoiding default. The ECB takes the credit risk and the currency risk and Fed provides the dollars…The Fed risk is failure of the ECB.
“But this does nothing to address the crises of excess debt and no growth in the PIIGS and now the core ECB as outside creditors abandon euro credit markets.”
Euro crisis = socialist chickens come home to roost.
Exactly.
Great Big Nanny / Mommy – State Vote-Buying Machines : Central Banks :: Enron : Arthur Andersen
According to Obama, the American people, who already have a $1.5 trillion budget deficit, $15 trillion in admitted liabilities, $25 trillion plus in loan guarantees and $40 trillion plus more in pensions and anti-Social in-Security, are extending a helping hand to our brothers in Europe.
Such is the schizophrenic nature of the world economic system that US Bank credit ratings are falling while the Dow is on a holiday tear. The system looks good on the outside, but it’s hiding a cancer: http://djia.tv/press-tv/top-us-banks-credit-ratings-fall/
Why doesn’t Germany just buy Southern Europe? We’re all Germans now, babe!
Heaven: where the police are British, the cooks French, the mechanics
German, the lovers Italian, and it is all organized and run by the Swiss.
Hell: where the police are German, the cooks British, the mechanics
French, the lovers Swiss, and it is all organized and run by the Italians.
So, you want a place where the police are German, the cooks German, the mechanics
German, the lovers German, and it is all organized and run by the Germans? While not as bad as Hell (at least the mechanics are German), still not a place for me
Better stock up on Rothbard coins!
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