Eideard

Daylife/Reuters Pictures used by permission

Six central banks led by the Federal Reserve made it cheaper for banks to borrow dollars in emergencies in a global effort to ease Europe’s sovereign-debt crisis.

Stocks rallied worldwide, commodities surged and yields on most European debt fell on the show of force from central banks aimed at easing strains in financial markets. The cost for European banks to borrow dollars dropped from the highest in three years, tempering concerns about euro’s worsening crisis after leaders said they’d failed to boost the region’s bailout fund as much as planned…

The premium banks pay to borrow dollars overnight from central banks will fall by half a percentage point to 50 basis points, the Fed said today in a statement in Washington. The so- called dollar swap lines will be extended by six months to Feb. 1, 2013. The Fed coordinated the move with the European Central Bank and the central banks of Canada, Switzerland, Japan and the U.K.

The six central banks also agreed to create temporary bilateral swap programs so funding can be provided in any of the currencies “should market conditions so warrant.” Those swap lines were also authorized through Feb. 1, 2013…

Two hours before the Fed announcement, China cut the amount of cash that the nation’s banks must set aside as reserves for the first time since 2008. The level for the biggest lenders falls to 21 percent from a record 21.5 percent, based on past statements.

While today’s move by the six central banks is likely to ease tensions in money markets, it falls short of some calls for the ECB to step up and act as lender of last resort for the governments of the 17-member euro area and buy unlimited amounts of government bonds. Germany, Europe’s largest economy, has resisted the idea, arguing it isn’t the ECB’s job to do so and would only be a temporary fix…

Under the dollar liquidity-swap program, the Fed lends dollars to the ECB and other central banks in exchange for currencies including euros. The central banks lend dollars to commercial banks in their jurisdictions through an auction process…

The coordinated action “lowers the cost of emergency funding and increases the scope,” Mohamed El-Erian, chief executive officer, of PIMCo. said in a radio interview today on “Bloomberg Surveillance” with Ken Prewitt and Tom Keene. Central banks “are seeing something in the functioning of the banking system that worries them,” El-Erian said.

Mohamed El-Erian would be understated about the end of the universe as we know it.

I’d love to know if it was Ben Bernanke or Tim Geithner – or both – who worked behind the scenes to get this herd of cats into an assembly of thrift and economic repair that should last at least a week or two. I’m convinced it was one or the other. And Euro egos are so tender they won’t be seen admitting either.

France and Germany may effectively run the European Union, but Finland has been demonstrating how even a small country can disrupt their grand designs.

By insisting that it receive collateral from Greece in return for aid, Finland is threatening to upend an agreement that euro zone countries, led by France and Germany, made in July to expand the E.U. bailout fund.

Finland would contribute less than 2 percent of the guarantees provided to the fund, known as the European Financial Stability Facility. But the country’s demands, the subject of intense negotiations in recent days, threaten to derail the fragile consensus that is preventing Greece from defaulting on its debt.

Finland is the most vivid example of the way domestic politics can become Continental problems, threatening the unity of the 17 euro zone members as they face their deepest crisis ever. But Germany, the Netherlands and Austria — all wealthy countries with strong economies — also harbor deep opposition to bailing out Greece, Portugal, Ireland or any other country that may become overwhelmed by debt…

In Finland, Prime Minister Jyrki Katainen faces discontent within his governing coalition as well as pressure from a nationalist opposition group, the True Finns, which rode euro-skepticism to big gains in April parliamentary elections…

Finnish officials say they want to resolve the collateral issue and contribute to the bailout fund. But they are also adamant that the country must receive guarantees.

“We have to listen to the people of Finland,” said a government official, who requested anonymity because of the sensitivity of the issue. “Collateral is an absolute condition for Finland to be involved.”

It is unclear what the collateral might consist of — jokes making the rounds suggest that Greece could pawn the Acropolis or the island of Corfu. And any concessions made to Finland would probably then be demanded by other countries like Austria, where citizens are also grumpy about having to provide tax dollars to support Greece…

They may be jokes to NYTimes writers; but, that was exactly the same response from my favorite banker when we got into a discussion of exactly these fiscal issues — the European Union not being a fiscal union.

Confederacies still haven’t anymore viable economic solutions than they have political solutions. A simple agreement for commerce and currency doesn’t guarantee sound monetary policy for seventeen different economies.

The European bank stress-test results are in, and the good news is that, of 90 lenders reviewed, only eight failed: five in Spain, two in Greece and one in Austria. A ninth bank, Germany’s Landesbank Hessen-Thueringen, probably would have failed but refused to disclose its data. Sixteen others narrowly passed, the European Banking Authority concluded.

The bad news is that banking regulators say the eight test flunkers will need to raise a mere 2.5 billion euros in fresh capital by year-end. How can that be bad news? Because the number lacks credibility. Almost no one believes that’s all it will take to shore up Europe’s troubled institutions, especially if Greece or another of Europe’s fragile economies defaults on its debt, which looks increasingly likely.

By contrast, Standard & Poor’s conducted its own analysis of European banks and concluded in March that they needed as much as 250 billion euros — or much, much more than the EU’s figure — to withstand a sharp increase in yields and a severe economic downturn. The U.S. required nine banks to raise $75 billion in new equity after stress tests were conducted in the spring of 2009.

What most undermines the credibility of this latest attempt to calm Europe’s financial fears — the third in three years — is that a sovereign-debt default wasn’t among the worst-case scenarios under consideration, even though credit-default swaps already indicate an 87 percent chance that Greece won’t be able to repay its debts. Instead, European authorities looked at the ability of banks to endure an economic contraction of 0.5 percent — in other words, a mild recession — as well as a 15 percent stock-market decline, rising unemployment, a drop in housing prices and trading losses on government debt…

Even if European leaders are in denial about the level of fresh capital required to stem the contagion, they are at least giving investors the tools to begin to figure it out themselves. Stay tuned — the stress tests could yet give Europe’s bankers palpitations.

The follow-on question will be — Euro regulators must consider if they have faith in existing oversight and enforcement or will they need an equivalent of Dodd-Frank to add [a rather mild] additional layer of eyes peering at the books of self-deluded bankers?

Daylife/Reuters Pictures used by permission

After months of quietly watching from the sidelines, the United States finally intervened in the European debt crisis on Sunday night.

The Federal Reserve announced that it would open currency swap lines with the European Central Bank — in essence, printing dollars and exchanging them for euros to provide some liquidity for European money markets and banks.

The step came after a hectic week in which Washington began to fear that the sovereign debt crisis threatened to infect the American economy and hamper its recovery, according to several United States officials…

The intervention, which also involves the central banks of England, Switzerland, Canada and Japan, is part of a colossal package intended to quell the restive credit markets with a show of force and resolve that American policymakers had quietly believed was lacking. The package has two other elements: about $950 billion in loan guarantees from the European Union, and a decision by the European Central Bank to intervene in the bond markets through a series of refinancing operations…

“It became increasingly clear that, if they were willing to take very strong measures, that it would be in the interests of the United States to encourage and support that,” one American official said…

In a statement, the Fed said the currency swaps were intended to make it easier for European companies, institutions and governments to borrow dollars when they need them, “and to prevent the spread of strains to other markets and financial centers…”

The Fed actually made money from the previous dollar swap program. The foreign central banks paid the Fed interest equivalent to what they made from lending the dollars. The Fed, however, did not pay any interest on the foreign currencies it took in exchange, having agreed to hold them instead of lending them out or investing them in the private markets. The new program is designed the same way.

None of which will punch through the minimal comprehension level of teabaggers and Republican ideologues.

Banks and the Federal Reserve will quietly continue doing what it is they are supposed to do. Lend and borrow money. The dollar ends up stronger.