New Delhi: Central banks from six developed nations had to resort to coordinated action on November 30 to ensure that the European debt crisis did not fundamentally destablise the global financial system. Europe's rolling debt crisis continues to trouble economies and markets.
To prevent a lack of liquidity in the global financial system, The US Federal Reserve, the European Central Bank and the central banks of Canada, Britain, Japan and Switzerland said in a joint statement that they have agreed to lower the cost of existing dollar swap lines by 50 basis points from December 5. Such a move is unprecedented and shows the extent of the problem.
Other measures included setting up bilateral swap arrangements between the central banks so that any bank could tap additional liquidity in their own currencies if necessary. The swap arrangements are good through Feb 1, 2013.
In the United States, the Fed noted that banks were not having difficulty now getting funds in short-term finding markets. But if conditions deteriorate, the US central bank said it has "a range of tools available" to use as a backstop and would deploy them as necessary.
The surprise coordinated move by central banks was aimed at preventing global financial markets from coming under pressure that could potentially lead to a seizing up of credit.
"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 said.
This action will make dollar funding cheaper for European banks that hold dollar-denominated securities but falls short of addressing the fundamental problems related to European government debt. Italian bond rates are an unsustainable 8 per cent and still liquidity is a problem, reflecting the world's shrinking confidence in Eurozone's ability to repay loans.
There will be temporary rally in the stocks market and the Euro will possibly gather a bit of its lost ground against the dollar. The dollar itself could take a minor hit after S&P lowered the credit ratings fort six top American banks.
JP Morgan Chase went from A+ to A; Goldman Sachs, Bank of America, Morgan Stanley and Citigroup were downgraded from A to A-; and Wells Fargo saw its rating cut from AA- to A+.
(With additional inputs from Reuters)