Central banks make dollars available to ease European crisis

Marketplace Staff Sep 15, 2011

Central banks make dollars available to ease European crisis

Marketplace Staff Sep 15, 2011

Steve Chiotakis: Five major central banks — including our own, the Federal Reserve — announced just about an hour ago, they’re going to step in and make dollar-based loans available to troubled European banks. This is a move they hope will ease at least some of the concerns about the European debt crisis.

We have Marketplace’s David Gura working on the story for us from Washington, and he’s with us live now from DC. Morning, David.

David Gura :Morning, Steve.

Chiotakis: What are these banks doing? Why are they doing it?

Gura: Well, normally, these European banks have a line of credit that allows them to borrow dollars for just a week.

Now, five central banks, as you mentioned, they’ve decided to extend that line of credit, to make dollars available to these European banks for up to three months. So this is still short-term funding, but they’ve extended that term a little bit.

Now, basically, this stems from concerns that European banks are in trouble, that the banking problems there are serious. There’s concern they don’t have enough dollars on hand, or they don’t have access to enough dollars, to run their businesses — at least not in the short-term, Steve. And policymakers hope this infusion of liquidity may help.

Chiotakis: Liquidity, alright. So now this sounds an awful lot like what the Fed was doing at the height of our financial crisis three years ago — shoring up troubled banks here. Is that right?

Gura: This is a little different. Back then, the Fed loaned billions of dollars to banks that were in trouble. This time around, these central banks are providing short-term funding.

Now, there are some economists who think this isn’t enough — that it won’t be enough. Simon Johnson is a member of that club. He used to be the chief economist at the International Monetary Fund.

Simon Johnson: Doing it through liquidity is a stop-gap. They need also to assess and raise substantially more equity, as a buffer against future losses.

Johnson says this plan may not be enough in the long-term, Steve, but so far, the markets seem to like it.

Chiotakis: Alright, Marketplace’s David Gura with us from Washington. David, thanks.

Gura: Thank you.

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