Coordination among central banks has limits
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People's Daily, December 7, 2011
The U.S. Federal Reserve Board announced on Nov. 30 that the Federal Reserve had decided to lower the interest rate on U.S. dollar liquidity swap arrangements by 50 basis points in a coordinated action with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank to ease the tight market liquidity and support the global financial system.
This joint action indicates further slashed cost of U.S. dollar loans, increased liquidity supply and boosted market confidence in the future.
The temporary currency swap arrangement between the Federal Reserve and other major Western central banks was launched in May 2010. The interest rate cut of 50 basis points, and lowering the cost of U.S. dollar loans can not only ease strains in the global U.S. dollar financial market but also relieve the anxiety of commercial banks to a certain extent.
In addition, this action will mitigate the pressure of assets sales on banks and ease the increasingly tense supply of credit in the euro zone. With further escalation of the euro zone debt crisis, it becomes increasingly difficult for euro zone banks to obtain financing.
The role of currency swap is to pass positive messages to stabilize the global financial system and help the world economy to recover early. It is beneficial but not crucial to the re-establishment of market confidence. For example, even if the financing cost declines, commercial banks must be capable of providing adequate collateral in order to obtain the U.S. dollar liquidity provided by central banks.
However, as the sovereign bonds held by commercial banks continue to be written down, and the euro zone countries are facing the added threat of a sovereign credit downgrade, banks can provide less and less collateral. The government bond prices have dropped sharply in Europe in recent weeks. As it is very difficult for government bonds to invite tenders even in Germany, it is more difficult for commercial banks to provide collateral.
The purpose of the joint action initiated by the six central banks is to help the banks with tight liquidity instead of the government in debt crisis. This might gain time for the European countries to promote financial and economic reforms.
If this joint action is a shadow, then executive measures will be a substantial wall to block the Europe debt crisis. It remains a priority and important agenda for the euro zone countries to improve financial rules, strengthen fiscal disciplines and implement more effective monetary policy.
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