22nd Oct 2016

Global central banks take action to prevent EU credit crunch

  • The emergency move will make it easier for banks to borrow US dollars (Photo: Maciej Janiec)

The US Federal Reserve, the European Central Bank (ECB) and the central banks of some of the world's key economies announced a co-ordinated emergency action to make it easier for banks to borrow US dollars - in effect preventing a global credit crunch.

The ECB and the Fed together with the Bank of England, the Bank of Canada, the Bank of Japan and the Swiss National Bank on Wednesday agreed to lower by by 50 basis points the cost of dollar currency swaps.

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It is the first such co-ordinated move made on this scale since the height of the 2008 financial crisis, although five international central banks provided special loans of US dollars to European banks in September following the downgrade of a pair of French banks in expectation of a Greek sovereign default.

The plan goes into effect 5 December and is to last until until February, 2013.

"The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity," the banks announced in a joint statement.

The ECB said that the move was necessary in order to provide a series of reciprocal swap lines on a temporary basis.

"This action will enable the Eurosystem to provide euro to those central banks when required, as well as enabling the Eurosystem to provide liquidity operations, should they be needed, in Japanese yen, sterling, Swiss francs and Canadian dollars (in addition to the existing operations in US dollars)," the Frankfurt-based institution said. 

As in 2008, when global central banks slashed interest rates together in an effort to pre-empt a credit crunch, this week's move also aims at preventing the system from seizing up.

The move will make it easier for banks everywhere to trade in US dollars, but it is European banks in particular that were in biggest need of the rescue.

For months reluctant to lend to one another, European banks in the last few weeks have increasingly been cut off from borrowing US dollars.

The situation became grave after the meeting of eurozone finance ministers on Tuesday when they admitted that they would be unable to leverage the region's bail-out fund anywhere near the level that had been hoped.

Without such a rescue, in effect mainly from the US Federal Reserve, the European banking system could have lurched to a halt.

Simultaneously, China slashed the funds that its own banks are required to hold in reserve in order to ease global liquidity.


Europe ready to tackle Greek debt relief

The Greek government has built and broadened alliances in EU institutions and member-states that acknowledge the need to restructure the debt and deliver another economic model for the eurozone.

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