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
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
On Tuesday evening, Standard & Poor's downgraded the long-term debt ratings of some of the largest banks in the world.
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.
There was a rumor that a European bank had nearly failed -- which is said to be untrue.
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.
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.
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.