Central banks' move won't fix Eurozone's ills
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Xinhua, December 2, 2011
Central banks around the world announced Wednesday they will take action to provide market liquidity and lower the borrowing costs of dollars.
The move, coming at a time when the eurozone debt crisis continues to fester, aims to shore up global financial markets and ease the credit crunch among European banks.
Analysts cautioned that such efforts can only boost market confidence in the short run, but will not address the underlying problems of the eurozone debt crisis.
EASING THE CREDIT CRUNCH
The U.S. Federal Reserve, along with the central banks of Canada, Britain, Japan, Switzerland and the European Union, said Wednesday they have agreed to lower the interest rate on dollar swap lines by 50 basis points from Dec. 5.
The swap lines, first introduced by the central banks to deal with the subprime mortgage crisis in 2008, are designed to provide easier access to dollars for banks outside the United States.
By cutting the costs of borrowing dollars in half for foreign commercial banks, the move will help ease the pressure on the Eupopean market, which is struggling with shrinking financing channels.
Starting this year, the U.S. Money Market Funds have gradually suspended their lending to the European banks out of growing concern over the latter's huge risk exposure to the Greek debts.
According to a report released by J.P. Morgan, lending to European banks in the U.S. market has been reduced by more than 700 billion U.S. dollars over the past year alone.
Masaaki Shirakawa, head of Japan's central bank, said the move was aimed at giving markets "a sense of relief."
"It should ease the panic around European banks significantly and help prevent a devastating credit crunch," he said.
In another move to ease the credit crunch, China's central bank cut the reserve requirement ratio for its commercial lenders Wednesday for the first time in nearly three years.
The Brazilian central bank Wednesday also cut its annual basic interest rate from 11.5 percent to 11 percent.
GLOBAL STOCK MARKETS RALLY
Global stock markets spiked sharply Wednesday following the announcement of the decision.
In Europe, London's FTSE 100 index rose 3.16 percent. The CAC 40 index in Paris registered a 4.22-percent increase, while the DAX 30 index in Frankfurt was up 4.98 percent.
U.S. stocks also rallied Wednesday. The Dow Jones Industrial Average surged 4.24 percent to 12,045.68 points, the biggest increase in a single day in three years. New York crude oil futures also skyrocketed, topping 100 dollars a barrel.
Meanwhile, yields on 10-year U.S. bonds, commonly regarded as a haven in troubled times, soared to 2.07 percent, the highest record in two weeks.
Fueled by the liquidity move of leading central banks, Asian markets also surged. The Tokyo stock market rallied 2 percent, Seoul's 4 percent, and Sydney's rose by more than 2 percent.
Ben Willis, floor broker on the New York Stock Exchange, said Wednesday's spike can only mean a short-term buy-in of the markets, because the central banks' intervention cannot cure the eurozone's ills once and for all.
NO PERMANENT FIX FOR EUROZONE'S ILLS
Analysts also agreed that the measure itself won't fix the eurozone's debt crisis.
Ian Stannard, head of European FX strategy at Morgan Stanley, said he believed these coordinated efforts would not significantly influence the debt crisis.
The move can lower the costs of borrowing dollars, and make dollars available for European banks. However, illiquidity is not the major source of risk that triggered the contagious eurozone crisis.
As of Nov. 23, banks outside the United States have only swapped 2.4 billion dollars from the Fed, well below the 580 billion dollars lent out at the nadir of the 2008 financial crisis.
During an interview with Fox Business Network, Dallas Federal Reserve Bank President Richard Fisher said the central banks' move was not intended to save Europe, but to increase the liquidity of dollars.
Shirakawa held a similar opinion. "The European debt problem can't be solved by liquidity provisions alone," he said. "The step is meant to buy time for European countries to proceed with their fiscal and economic reform."
Outside intervention can buy time for the eurozone, but only the eurozone can cure its own ills.
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