The Federal Reserve and five other international central banks took a coordinated response on Wednesday to lower borrowing costs for banks and prevent a liquidity crisis that is on the verge of crippling Europe.
The new premium banks will pay to borrow dollars from central banks will fall by a half percentage point to 50 basis points. Dollar swap lines will be lengthened to Feb. 1,2013.
The European Central Bank (ECB), Federal Reserve, and central banks from the U.K., Canada, Switzerland, and Japan also agreed to create a temporary bilateral swap program.
Global markets rallied in response to the coordinated international response from the central banks along with China’s latest decision on Wednesday to lower capital requirements for their banks.
Global markets have plunged in recent weeks due to the financial instability with the European Union. Although U.S. economic data has been improving lately and displaying reasonably positive growth rates realtively speaking, Europe’s ongoing debt woes and lingering default worries have caused major selling in equities, most notably with financials.
European Central Bank Annual Report- Dec 1st
On Thursday morning in Brussels European Central Bank President Mario Draghi addressed the EU parliament during the ECB Annual Report. Draghi said that the ECB policy is guided by price stability goal and yet he acknowledged the risks that still linger in the European Union.
He cautioned against repeating the debt crisis that has already engulfed dysfunctional economies and threatens the stability of global markets. “Dysfunctional bond markets in several Euro area countries hamper the single monetary policy because the way this policy is transmitted to the real economy depends also on the conditions of the bond markets in various countries.”
Draghi fell short of affirming the often cited ECB characterization as the “lender of last resort” with its capability of offering a “bozooka” bond buying type of response to Europe’s mounting debts.
Draghi explained, ” ECB bond intervention can only be limited.” He suggested that the ECB may play an instrumental role to alleviate the crisis but emphasized that governments must back proposals to align their budget policies.
“A new fiscal compact would be an important signal” Draghi said.
Economists have clearly signaled for a more unified fiscal policy within the 17 nation European Union. But the ECB has no powers to enforce or govern a unified fiscal policy within the 17 governments of the Europe Union. This big responsibility falls on the shoulders of elected European officials throughout the euro zone and takes considerable time to get sorted out.
Global markets have already become increasingly nervous about the European Union’s uncoordinated and even clumsy past attempts to resolve their ballooning debt problems.
The question that is raised now concerns whether or not the global markets will continue to wait longer for European governments to show the gains from their nascent austerity measures.
Is the EU truly capable of developing a clear picture about how to form a unified and comprehensive EU fiscal policy within the euro zone that is truly capable of penetrating and reducing their sovereign debts? That question may take some time to answer.