This is truly incredible. It is 3 years, to the day, of the Lehman Brothers bankruptcy and we get an announcement the Federal Reserve is de facto bailing out Europe through a massive dollar liquidity injection:
Five of the world's top central banks acted jointly Thursday to provide unlimited dollar loans to banks, a move aimed at easing the growing tensions in the eurozone's financial sector and shielding the global economy from its jitters.
The European Central Bank said it will coordinate with the U.S. Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank to offer three-month dollar loans to banks through the end of this year.
The Fed didn't even issue a press release on this major move. Dylan Ratigan did a segment, with Barry Ritholtz commenting:
Earlier Moody's downgraded French Banks Société Générale, Crédit Agricole and put BNP Paribas under review.
Moody’s downgraded its ratings for Société Générale by one notch to Aa3 and for Crédit Agricole to Aa1, citing their exposure to the Greek economy and the fragile state of bank financing markets. It left BNP Paribas at Aa2, saying the bank had “ an adequate cushion to support its Greek, Portuguese and Irish exposure,” but kept it under review.
Now we have this, the Federal Reserve getting into the mix.
The Financial Times:
A number of gauges of stress in funding markets for European banks fell off from their highest levels since the 2008-09 financial crisis. The euro, which had fallen sharply against the dollar in recent weeks, rose 0.9 per cent to $1.386. US, German and UK government bond yields all moved away from multi-decade lows.
The move by the central banks, in conjunction with the US Federal Reserve, followed escalating difficulties, especially at continental European banks, in obtaining dollar funding as US investors took fright at the eurozone debt crisis. The Bank of Japan, which had already offered three-month dollar liquidity, also said it would be making additional offers to cover the year-end period.
But it also reflected a desire to be forestall tensions rather than addressing immediate needs – in recent weeks there has been scant or zero use of existing weekly ECB offers of dollar liquidity. The three-month maturity of the loans will increase planning security at banks and avoid them having to return weekly for dollars – at the risk of being stigmatised as weak institutions.
Supposedly swap lines are no risk to U.S. taxpayers, but that sure isn't true in the case of a Euro collapse:
Well, in an extreme case the U.S. taxpayers are on the hook. Now, the way that it works is that Europe’s government enters into agreements with the foreign central bank, in this case the European Central Bank, that we will exchange U.S. dollars for local currency, the Euro, at an agreed-to exchange rate, which is then locked in as of today. The ECB has an obligation to repay those dollars at some point at that exchange rate. So theoretically, the U.S. doesn’t have risk. We’ve gotten rid of the exchange rate risk through that agreement. Even the credit risk, should the collateral that the ECB lends dollars against go bad, then it would be the ECB who would have that credit risk. To that point, no, the Fed doesn’t have any risk. However, given the severity of the crisis in Europe, there remain questions as to whether the European Union might break apart, could see change in membership, and that the ECB could end up in trouble. So if the Euro collapses, the question is, where would we end up getting repaid? And in that extreme example, the U.S. is on the hook it seems.
That’s also an important point to consider, because really, the Fed has thus committed to support the European Union and the Euro through these transactions. And that almost seems to take them out of the role of monetary policy almost into the role of foreign policy. Because it’s now not just a matter of bank stability and international financial market stability, but in fact the Fed inserting itself in support of the stability of the European Union and the Euro itself.
Credit Writedowns sums up what this really means, it's basically prep work for a Greece default, later down the pike.
This latest dollar funding scheme addresses the symptoms but not the illness. The illness is that Greece is insolvent, and one of the symptoms is that banks are afraid to lend to each other and are instead hoarding cash. Today’s actions won't PREVENT a Lehman-type event (Greece is insolvent, period), but they could MITIGATE the dislocations and market turmoil that will likely result from such an event. We fully expect policy-makers are preparing quietly for a Greek default, and would look for more and more preparatory measures in the coming months.