Friday

29th Mar 2024

EU and US central banks consider currency swap

  • Problems in the US sub-prime mortgage sector are causing global market turmoil (Photo: www.freeimages.co.uk)

Amid fears that US mortgage market problems would prompt a worldwide credit crunch, the European Central Bank, ECB, is expected to continue pumping funds into the eurozone banking market today (13 August).

According to the Financial Times, the Frankfurt-based institution may also seek to arrange a currency swap with the US Federal Reserve – a move allowing it to lend dollars to European banks struggling to meet short-term dollar funding needs.

Read and decide

Join EUobserver today

Get the EU news that really matters

Instant access to all articles — and 20 years of archives. 14-day free trial.

... or subscribe as a group

"The attitude is don't show me anything east of a [New York] 212-area code'. If you lend to [those banks], it could be a career-ending experience", one banker said, the FT reports.

An ECB request for a currency swap – reportedly due in the next few days – is seen as a helpful way of dealing with the market turmoil and is likely to be welcomed by the US Federal Reserve.

A swap would be "a market calming measure and would be logical in the current situation", Chris Furness from economics consultancy 4Cast told the FT.

It would also be the first such arrangement between the world's two biggest central banks following the terrorist attacks in the US in 2001.

Conditions in the money markets have been extremely difficult since last Thursday (9 August), when French Bank BNP Paribas suspended three investment funds worth two billion euros, citing problems in the US sub-prime mortgage sector.

"The complete evaporation of liquidity in certain market segments of the US securitization market has made it impossible to value certain assets fairly regardless of their quality or credit rating", BNP Paribas said in the statement.

Sub-prime mortgages are loans made to borrowers who would not usually qualify for the normal market interest rates, often due to a poor credit history.

They are riskier both for the borrower and lender because of this combination of higher interest rates and weak credit history.

New market conditions have prompted banks to seek ways to limit their risks and they have begun charging significantly more for the money they lend to each other.

For their part, central banks worldwide have responded by injecting cash into the financial system.

The ECB poured €61.05 billion into the eurozone money market on Friday (10 August) "to assure orderly conditions in the euro money market".

The US Federal Reserve, the Bank of Japan and the Reserve Bank of Australia also injected cash into the system to ensure sufficient liquidity.

European stock markets were in positive territory across the board at the market opening Monday (13 August), in a tentative sign that swift Central Bank intervention has calmed investors' jitters.

And the ECB said Monday morning it will continue to "closely monitor" developments in the market, in another bid to soothe market concerns.

Sarkozy calls for more market monitoring after recent turmoil

After days of turbulence on global markets prompted by US mortgage sector problems, questions are being asked about whether more could have done to avoid the crisis. The EU is looking into the role played by rating agencies while France has called for greater financial transparency.

'Swiftly dial back' interest rates, ECB told

Italian central banker Piero Cipollone in his first monetary policy speech since joining the ECB's board in November, said that the bank should be ready to "swiftly dial back our restrictive monetary policy stance."

Opinion

EU Modernisation Fund: an open door for fossil gas in Romania

Among the largest sources of financing for energy transition of central and eastern European countries, the €60bn Modernisation Fund remains far from the public eye. And perhaps that's one reason it is often used for financing fossil gas projects.

Latest News

  1. Kenyan traders react angrily to proposed EU clothes ban
  2. Lawyer suing Frontex takes aim at 'antagonistic' judges
  3. Orban's Fidesz faces low-polling jitters ahead of EU election
  4. German bank freezes account of Jewish peace group
  5. EU Modernisation Fund: an open door for fossil gas in Romania
  6. 'Swiftly dial back' interest rates, ECB told
  7. Moscow's terror attack, security and Gaza
  8. Why UK-EU defence and security deal may be difficult

Stakeholders' Highlights

  1. Nordic Council of MinistersJoin the Nordic Food Systems Takeover at COP28
  2. Nordic Council of MinistersHow women and men are affected differently by climate policy
  3. Nordic Council of MinistersArtist Jessie Kleemann at Nordic pavilion during UN climate summit COP28
  4. Nordic Council of MinistersCOP28: Gathering Nordic and global experts to put food and health on the agenda
  5. Friedrich Naumann FoundationPoems of Liberty – Call for Submission “Human Rights in Inhume War”: 250€ honorary fee for selected poems
  6. World BankWorld Bank report: How to create a future where the rewards of technology benefit all levels of society?

Join EUobserver

EU news that matters

Join us