Fed + Five Central Banks = Rate Cut on Dollar Swaps

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. 🙂

Part of the problem includes Euroland banks unwilling to get in bed with each sufficiently to loan dollars to each other. As long as Angela Merkel tries to stay in office and refrain from supporting bonds issued by the ECB – nothing will happen at the northern end of the European Union. The EU is still stuck with the laggard economies they invited in by winking and nudge-nudge machinations over sovereign debt and fiscal practices in southern Europe.

There are a couple of potential long range solutions none of which are palatable to the EU as presently constituted. Especially the idea of having a two-stage membership, fiscal union or currency.

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.

2 thoughts on “Fed + Five Central Banks = Rate Cut on Dollar Swaps

  1. danielfee says:

    I agree with your opinion that it was Bernanke and/or Geithner behind todays central bank announcement. I think it was most likely both, since they are 2/3 of the team that bailed out the U.S. banks in 2008. This looks like an attempt to save the EU banks. The market reaction was wildly over optimistic to a temporary attempt to fix the European debt problems. When people realize that the central banks anouncement was because they are panicking, which I think was because the German bond sale at the end of last week did not go well, the markets will reverse sharply. I think we are in for a new round of volitility like we saw in August 2011 and Sept/Oct 2008.

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