Alan Greenspan, former chairman of the Federal Reserve, used to claim it was better to mop up after financial collapses than try to prevent them. Today’s leading central bankers clearly think differently. Coordinated action by the Fed, the European Central Bank and four brethren on Wednesday is a sign that monetary bigwigs do not want to deal with the crisis that would follow the disintegration of the euro.
The promise of open-ended dollar funding at a lower cost than before will directly reduce pressure in only one financial hotspot, cross-border bank financing. Stressed euro zone banks and cautious lenders elsewhere have been shying away from extending dollar-denominated credit. In effect, central banks have now promised to do what the private sector won’t, and at an attractive rate.
That should ease the pressure on European banks, giving them more time for the deleveraging they need to do. That in turn should loosen conditions in areas like trade finance and leasing, helping boost economic activity. That’s one reason the six central banks’ unexpected promise — amounting, like it or not, to a commitment to print as much money as it takes to keep an important market open — was greeted warmly by investors on both sides of the Atlantic.
The move does not address directly the hottest financial spot, the euro itself. Investors are still treating weak European sovereign borrowers as pariahs.
And sensible people are still talking about the breakup of the single currency. But the central banks have shown they are willing to fight fear with near-unlimited money. And among their number is the ECB, which up to now has been reluctant to commit to supporting individual member governments. The assumption has to be that it is now more likely to do so.
Even the ECB, backed by other central banks, can’t carry the euro out of danger alone. But it can buy time for euro zone member governments to find a similar degree of unity in their commitment to the single currency. Months of bickering have shown just how hard that is to achieve. But if the politicians can do it, they — like the central banks — stand a chance of facing down the euro fragmentation fear that has been gripping markets.
