Propping Up the Euro

one bond auction at a time. The central banks of the United States, Japan, the United Kingdom, Canada, Switzerland, and the European Central Bank have announced a coordinated effort to prop up the euro:

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. 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.

These central banks have agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points. This pricing will be applied to all operations conducted from December 5, 2011. The authorization of these swap arrangements has been extended to February 1, 2013. In addition, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank will continue to offer three-month tenders until further notice.

The word for today, apparently, is “coordinated”. I’m seeing it pop up everywhere.

There has been a flurry of commentary on the central banks’ moves. I note with some satisfaction that former Fed governor Randall S. Kroszner at Freakonomics has seen the analogy between the situation that the members of the EMU face and that of the various states under the Articles of Confederation in 1780:

In all of this, it is crucial that the ECB be able to maintain its independence and credibility. The ECB can provide liquidity support to the banking and financial system, both through short-term and longer-term lending, much as the Federal Reserve did during the crisis. Encouraging European banks to obtain dollar funding through the Fed-ECB swap line arrangement would also reduce liquidity pressures that could spill over to U.S. institutions. Simply having the ECB buy the debt of troubled member states, however, will not solve the fundamental fiscal and governance problems that are necessary to sustain the Euro. Otherwise, we run the risk of “Not worth a Euro” replacing “Not worth a Continental.”

Megan McArdle see the moves as just another Band-Aid:

This is a band-aid. It’s a good band-aid. But making it easier for local banks to borrow in dollars does not, in the end, fix any of the problems with the euro-zone. It just delays the rate at which the current sovereign crisis turns into a banking crisis.

I think it’s somewhat less than a Band-Aid. It’s just trying to prevent retreat from turning into a rout. The bankers are merely trying to get through the next bond auction. What will they do for the next? Or the next?

3 comments… add one
  • Icepick Link

    The most accurate assessment remains this bit of fun from the YouTube.

    “You have the US government promising everyone that they will buy everything forever. How can it be difficult to make money in that environment? You just have to make sure you buy it before they do. You have to buy the dip. If you don’t, then you are a fucking idiot. Just buy the fucking dip and you will make money too.”

  • Ben Wolf Link

    The ECB has capacity to provide unlimited liquidity to the EMU banking system, but we get gimmicky efforts like this because the Germans don’t understand that liquidity is endogenous. It can’t create inflation.

  • Ben Wolf Link

    After looking at the actual press releases from the banks central, this move isn’t even a band-aid; it’s a non-event that will accomplish nothing. The whole thing is a giant PR stunt to placate markets that clearly don’t understand what the announcements mean, otherwise they wouldn’t be rallying. Introducing a little liquidity via the USD will not improve the EMU’s fiscal situation.

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