Fed to the rescue of euro banks
The Federal Reserve, along with every other major central bank in the industrialized world, has given an open ended pledge to Europe's big banks for an unlimited supply of dollars to guarantee that credit markets remain unfrozen.
Major central banks around the world will cooperate to offer three-month U.S. dollar loans to commercial banks in order to prevent money markets from freezing up in the wake of Europe's sovereign debt crisis.
The European Central Bank said on Thursday it would hold three fixed-rate operations between October and December to provide banks as many dollars as they needed, in order to ease any funding crunch over the year-end.
"The European Central Bank has decided, in coordination with the (U.S.) Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank, to conduct three U.S. dollar liquidity-providing operations with a maturity of approximately three months covering the end of the year," the ECB said.
The move became necessary when private money market funds began pulling out of the big banks late last week, creating a liquidity crisis. American banks stepped in temporarily to supply billions in credit, but it wasn't going to be enough.
Meanwhile, in a huge move reminiscent of the worst days of the financial crisis, the biggest central banks in the world - the ECB, the Fed, the the Bank of England, the Bank of Japan and the Swiss National Bank - have announced a massive coordinate injection of unlimited three-month liquidity, designed "to offer banks as many dollars as they needed".
Yes, I think that it's fair to assume the reports of a liquidity crunch were pretty much on the money.
The world's central banks, then, have managed to kick the can another three months down the road - but I'm with George Soros on this one: we're pretty much at the end of that road, now, and something much more substantive has to be done.
The Fed won't offer any loans but "it maintains dollar swap lines with the ECB and other central banks to ensure they can obtain additional supplies of dollars when needed."
So no "bailout" in the way we understand that term, but this action certainly makes the Fed at least a minor stakeholder in the fate of the euro and the future of the EU. There probably was no chance we'd sit on the sidelines and watch Europe burn anyway, but this coordinated action by the large central banks presages some kind of deal that would take Greece off the hook and deal with the other debtor nations before they too face default.