EU backstops euro with almost $1 trillion, US joins the fray
Over the weekend, the European Union put into place a nearly $1 trillion plan to help backstop the spreading European debt crisis. As usual, the market鈥檚 initial reaction to government intervention is a standing ovation. Nothing moves the Dow higher 鈥� up over 400 points 鈥� quite like world central banks firing up the printing presses and offering a basically unlimited supply of fiat currency.
Of course, not to be outdone, the king of the fiat currency hill, the US with the reserve currency dollar, has gotten into the act.
This from Businessweek:
鈥淭he swaps with the European Central Bank, Bank of England and Swiss central bank will allow them to provide the 鈥渇ull allotment鈥� of U.S. dollars as needed, the Fed said late yesterday in a statement in Washington. A separate swap line with the Bank of Canada will support as much as $30 billion, the Fed said, and the Bank of Japan said it approved reactivating its U.S. line. The swaps were authorized through January 2011鈥�
鈥溾�n a swap, central banks exchange foreign currency with an agreement to reverse the transaction at a later date. The central banks will then lend the dollars at fixed rates to firms in their countries. Dollar liquidity tightened in London last week amid concern financial institutions are holding too many assets of Europe鈥檚 most-indebted nations.
鈥淭he action signals that Fed officials are concerned about implications of the Greek crisis for American markets. 鈥楾hese facilities are designed to help improve liquidity conditions in U.S. dollar funding markets and to prevent the spread of strains to other markets and financial centers,鈥� the Fed statement said.鈥�
For the first time since the financial crisis, the US is reopening its swap line with the ECB to support a once again fragile international banking system. It鈥檚 a move that will continue to inflate the Fed鈥檚 already hugely bloated $2.33 trillion balance sheet. The swap hit over a half trillion dollars at its last peak in December 2008. Peanuts, really.
You can read all the details in Businessweek鈥檚 coverage of how the Fed has restarted its currency-swap tool.
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