drz-400
DP Veteran
- Joined
- Oct 12, 2009
- Messages
- 2,357
- Reaction score
- 551
- Location
- North Dakota
- Gender
- Male
- Political Leaning
- Conservative
Well the critics are morons on so many levels and their views are most likely based on partisan political ideology than reality.. wonder if it is the same morons.. err critics that claimed that the EU had to be bailed out with 6 trillion Euros... any ways... Banks and the financial industry run on liquidity, and when liquidity is drained from the market then yes banks get into solvency problems because they can not meet their day to day liquidity needs. So what the fed and the rest of the industrialised worlds banks did today might be a temporary solution some what, but it had the desired effect and hopefully the market will start to question validity of the "critics" who are ruling the world markets now.
The only downside might be that the need for the ECB to actually print money will be dampened a tad, which will play into the hands of the Germans who dont want the ECB to print money.... but then again it might give the Eurozone the time politically to get their ducks in place so to say.
Spreads on inter bank loans denominated in Euros are becoming alarmingly high once again, the swap lines are being implemented so that central banks can offer liquidity in foreign currencies and also reduce the cost of such transactions. The risk premium paid while using Euro's (see Euribor EONIA spread) shows that the ECB has not only failed to keep the markets liquid in comparison to other central banks, but there is considerably more default risk associated with banks holding the currency. If, for instance the fed, or any other central bank has to use the swap lines, not for domestic currency, but for the Euro, they will have to distinguish between a liquidity problem and a solvency problem. A central bank cannot solve the problem of a debt that will not be repaid. The Euro-zone has a balance of payments problem, some countries have large external debts within the Euro, but due to the monetary union the currency cannot make the necessary adjustments, and with the ECB unwilling to back up these sovereigns it threatens to leave these countries and the banks that hold their debts bankrupt. That is reality. The recent action by central banks can only solve liquidity problems, it is only a way to soften/slow down the process and protect solvent institutions, but the underlying dynamics are unchanged.