The involvement of the central banks of is an attempt to demonstrate that all the central bankers are collaborating. Their aim is to relieve the Euro crisis. Numerous Lots of banks in Europe, issue out dollar denominated loans. This is because the interest rates offered in US are very low. Financing of loans is through short term borrowing sourced from other institutions. When banks in Europe buy assets that are dollar denominated, it is usually done in the wholesale deposit market. The European banks have access to funds in their native currency and can be utilized to hedge risks associated in the currency markets.
The Euro crisis has exarcebated the currency swap process as it is now more expensive to borrow from the Federal reserve. Thus, the Fed’s position has created stability as it is an effort to assist the euro financial crisis.
The current deterioration of Europe’s debt crisis is fast proving to be a source of increasing fear and dissatisfaction for U.S. government officials. It is also becoming the sole major threat to efforts in trying to improving the American economy.
This month, policymakers found an opportunity to act. The Coordination between the Federal Reserve, and European countries allows European lenders access to cheaper dollars. This attempt, is intended to subdue uncertainties of a credit squeeze. This move was viewed by most analysts as the most encouraging development and the financial markets reacted positively to the news. Although these efforts were modest, they were not expected to act as the silver bullet to the crisis.
The focus on White house administration’s strategy has been to push for a strong bail out fund that will be able to mitigate future debt crisis in the Euro region, such as that witnessed in Greece and Italy. The fund would act as a firewall that will allow members of the Euro zone to borrow at reasonable rates.
The officials want to make sure that the firewall is strong enough that the core Euro zone countries can borrow at affordable rates.
Although it doesn’t restore the health of the Euro fully, the Fed’s action will surely encourage confidence that has been lacking in the markets. It further encourages leaders and finance ministers to deal with the crisis fast and with force. Banks in Europe at the time, started finding it costly to borrow dollars and this inhibited their capability to lend out dollars, leading to a depreciated Euro. Thus, the move by the ECB, to borrow dollars was the right move.
The second article discusses on the credit swap facility between the ECB and the Federal reserve and its mode of operation. During the crisis, the European Central Bank, has had to seek for cheaper source of dollars in order to lend out to banks within the Euro zone. The swap entails the exchange of between the Euro and dollars, whereby the ECB borrows dollars at a certain rate and the federal reserve can do the same without paying any interest rates. The whole transaction is done electronically. The fact that it is done electronically ensures the perpetual borrowing of dollars and Euros. The crisis has although introduced a strain on this facility as skeptics are wondering if the Euro zone banks will default on the loan offered.
The fed’s position to borrow out dollars to the ECB is the correct move as it ensures confidence in the markets as well as acting as a form of investment for the Federal exchange.