15 Sep 2011

World central banks act to stem Eurozone crisis

Five of the world’s most powerful central banks have flooded the international financial system with dollars to stave off a liquidity crisis in European banks.

Acting in concert the US Federal Reserve, the Bank of England and the central banks of Switzerland, Japan and Europe have made avaliable to the banking system an unlimited fund of dollars.

Their action comes after days of concern over the impact on Europe’s banks of a possible default by Greece and other troubled European economies.

In recent days US funds are believed to have cut off routine dollar funding to many large eurozone banks in response to the ongoing political wrangling over how to resolve the Greek debt crisis.

This latest move provides unlimited dollar funding for those banks until the end of the year, but does not solve the underlying problem.

Channel 4 News Economics Editor Faisal Islam comments: “it’s a dramatic move, the like of which we saw after the collapse of Lehman Brothers. It must have been driven by the US and illustrates just how concerned they are about European sclerosis. But it only buys time; a permanent solution still has to be hammered out.”

In a move widely seen as an attempt to pressurise Europe’s politicans to take action to solve the crisis, US Treasury Secretary Timothy Geithner is due to attend a meeting of european finance ministers in Poland on Friday.

The part played by politicians in the economic crisis in Europe was also addressed in a speech by the head of the IMF and former French finance minister, Christine Lagarde.

Speaking in Washington DC she said that timid economic growth and weak public balance sheets in developed nations were combining to fuel a crisis of confidence which was restraining demand, investment and employment: “This vicious cycle is gaining momentum and, frankly, it has been exacerbated by policy indecision and political dysfunction.”