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Reply #90: Fed saves Europe's banks as ECB stands pat MUST READ [View All]

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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Thu Dec-01-11 01:26 PM
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90. Fed saves Europe's banks as ECB stands pat MUST READ

Stripped to essentials, America is once again having to rescue Europe from itself. The interwoven banking and sovereign debt crisis in the eurozone has become so dangerous for the world that the US Federal Reserve has been forced to take emergency action, acting as global lender of last resort to shore up Europe's banking system. That it should have to do so as Germany and the European Central Bank hold back for legal reasons and refuse to commit decisive power adds a strange diplomatic twist.

The move came once it was clear that Europe's prostrate banks would struggle to roll over $2 trillion (1.3 trillion) of debts denominated in dollars. Data from ratings agency Fitch shows that US money markets have slashed funding for French banks by 69pc and German banks by 50pc. Strains have been ratcheting up over the past two weeks. European banks are mostly shut out of the dollar market, or only able to raise money for a week at a time.

The so-called "stress alarm" the euro/dollar three-month cross currency basis swap spiralled down to minus 166 points early on Wednesday, uncannily like the last days before the Lehman crisis metastasized in October 2008. The stress has been rising in lockstep with Italian, Spanish, Belgian and French bond yields for two weeks, but became violent after eurozone finance ministers admitted on Tuesday night that they were unable to leverage Europe's bail-out fund much beyond 600bn (514bn). "Conditions have changed, so it is likely to be less than 1 trillion," said Eurogroup chair Jean-Claude Juncker.

The joint offer of cut-rate currency swap lines by the central banks of the US, Britain, Japan, Canada, Switzerland and the ECB preserves the polite fiction that this was to "ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit", but this was a Fed action to provide cheap dollar funding and head off a lethal crunch in Europe...China took its own precautions perhaps in concert cutting its reserve ratio for the first time in three years to boost liquidity...


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