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.Why did this happen?
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 the euro’s worsening crisis after leaders said they’d failed to boost the region’s bailout fund as much as planned.
“It’s supportive but not necessarily a game changer,” said Michelle Girard, senior U.S. economist at RBS Securities Inc. in Stamford, Connecticut. “The impact is more psychological than anything else” as investors take heart from policy makers’ coordination, Girard said.
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.
On Tuesday evening, Standard & Poor's downgraded the long-term debt ratings of some of the largest banks in the world.There was a rumor that a European bank had nearly failed -- which is said to be untrue.
By Wednesday morning, the Federal Reserve, the European Central Bank and central banks from
Canada, England, Japan and Switzerland announced coordinated action to support liquidity in financial markets that mirrors the 2008 financial crisis.
Mere coincidence? Likely not.
Once banks saw their ratings downgraded, it raised the specter that they would have to post billions in additional collateral on trades just as market pressures make it hard for them to replace the funds through a stock or bond offering.
The Interwebs are all aflame with a rumor that a European bank was about to go kaput last night, which is what inspired central banks to turn up the liquidity spigots today.Regardless of the rumor mill, the impetus for this coordinated move -- whatever it was -- can't be good; central banks don't increase liquidity in a massive move unless there is something wrong somewhere. Period.
Trouble is, there’s not an ounce of evidence this is true.
The rumor is based on a blog post written at Forbes by a nuclear physicist/hedge-fund manager that is pure speculation on his part: The only reason central banks would do this, he says, is if a bank was on the verge of failure.