Friday, September 16, 2011

Fed bails out Europeans with dollars

The European Central Bank (ECB) can “print” as many euros as it wants, and it has been doing so to purchase near-toxic bonds from Italy and Spain. However, the ECB cannot print dollars, and for the last couple of weeks there’s been a growing crisis that European banks don’t want to lend dollars to one another, let alone to other entities. U.S. money market funds and other traditional dollar lenders have become increasingly nervous about the threat of a Greek debt default. The ECB itself has been lending dollars to European banks, but the ECB is running out of dollars. Bloomberg

In order to “kick the can down the road” yet one more time, and to provide three more months for the Europeans to find a way to keep Greece from defaulting, the Fed is setting up a “liquidity swap program” with four foreign central banks — the ECB, the Bank of England, the Bank of Japan, and the Swiss National Bank. The Fed sets up “swap lines” with the foreign banks, exchanging their currency for dollars, with an agreement that the foreign banks have to exchange back at a fixed date, after three months in this case. Thus, the Europeans now have enough dollars to last them until the end of the year. Reuters and Federal Reserve

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