Tags: Central | Bank | euro | Crisis

Experts: Coordinated Central Bank Action Won't Ease Euro Crisis

Friday, 15 Jun 2012 08:32 AM

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Talk is brewing that central banks around the world are preparing coordinated action to protect the world's financial system from an escalating European debt crisis.

Action could involve pumping liquidity into global markets should Greece exit the eurozone in a messy fashion and send shockwaves around the world.

It's not likely, experts say, unless disaster strikes.

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

"You will see (global coordinated action) if Greece exits the eurozone and if proves to be a Lehman-type event, and you start seeing a run on the banks across the eurozone,” Alastair Newton, Managing Director and Senior Political Analyst at Nomura International, tells CNBC.

"You will get action from the Fed and other central banks. But not as it stands at the moment."

Central banks have acted in unison in the past.

In late 2011, the U.S. Federal Reserve, the European Central Bank and the Central Banks of Canada, Britain, Japan and Switzerland agreed to lower the cost of dollar swap lines, a move that aimed to make it easier for banks in Europe to get access to dollars.

Cutting interest rates on the swap lines — short-term loans in this case denominated in dollars — aimed to prevent a credit crunch from striking the global economy, especially in Europe.

Central banks took bigger coordinated steps back in 2008 to flood the global economy with liquidity in wake of the Lehman collapse, but today, individual central bank actions have left credit markets largely unfrozen.

"You look at the basis swap market in euro-dollar…you look at the amount of foreign commercial paper issuance in the U.S., it’s all at pretty good levels," Will Oswald, head of Standard Chartered Bank’s Fixed Income, Currency and Commodities Research division.

"So are you going to get the ECB stepping in right now when the funding markets are not telling us that it’s under major stress? It’s not a signal at this point."

European Central Bank President Mario Draghi has said the monetary authority would act if needed to keep the continent's banking system solvent though no official comments of coordinated action have emerged.

"The ECB has the crucial role of providing liquidity to sound bank counterparties in return for adequate collateral. This is what we have done throughout the crisis, faithful to our mandate of maintaining price stability over the medium term — and this is what we will continue to do," Draghi says, according to Reuters.

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.



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