A co-ordinated programme of action to ease credit conditions has today been announced by six central banks of developed nations .…..
Azad Zangana
European Economist
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Borrowing rates for European nations such as Italy, Spain and others have soared in recent months on concerns about Eurozone sovereign debt. While banks need dollars to fund their daily operations, their access has dried up as US money market funds have reduced their lending to European banks.
Today’s move by the central banks will make it easier for European banks that hold dollar-denominated securities or make dollar loans to access US currency. They have agreed to lower the pricing on existing dollar liquidity swap arrangements by 50 basis points, bringing the new rate to 50 basis points over the OIS rate.
In liquidity swaps, one central bank swaps its currency for that of another central bank, and can then make loans in the foreign currency to its local banks, with the aim of encouraging lending.
Stockmarkets have reacted positively to the announcement. While we see this cut in the dollar swap rate as a useful move which should remove some of the strain in the global financial system, it does not warrant the 3% to 5% uplifts
we have seen across markets so far today. It does not change any of the fundamental problems in Europe, nor does it provide a long-term and sustainable funding solution to the European banking crisis currently unfolding. While European finance ministers have been meeting in Brussels since yesterday, very little clarity has been delivered on how the currency union will proceed.
Also in the news today – China’s central bank announced that the amount of money China’s commercial lenders must hold in reserve will be cut by 0.5 per cent of their deposits. This is the first easing of monetary policy in three years.
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The views and opinions contained herein are those of Azad Zangana, European Economist , and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.
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