MW: Global central banks move to bolster liquidity
Lower price on dollar swap lines as Europe tensions rise
By William L. Watts, MarketWatch
FRANKFURT (MarketWatch) — Global central banks announced coordinated action on Wednesday to shore up liquidity in the financial system as Europe’s banking system showed growing signs of stress amid the euro zone’s deepening debt crisis.
The moves were announced in statements issued simultaneously by the U.S. Federal Reserve, the European Central Bank, the Bank of England, the Bank of Japan and the Swiss National Bank.
“The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity,” the banks said.
The central banks agreed to lower the pricing on existing temporary U.S. dollar liquidity swap arrangements by 50 basis points, putting the new rate at the U.S. dollar overnight index swap (OIS) rate plus 50 basis points. The pricing will apply to all operations beginning Dec. 5.
The announcement lifted European equities and triggered a surge by U.S. stock futures. The euro EURUSD +1.12% jumped versus the dollar and changed hands at $1.3437 in recent action, up 0.9% from Tuesday.
The move comes as European banks scrambled to acquire dollars. The cost of swapping euros for dollars via implied one-month cross-currency basis swaps rose to its highest level in three years on Tuesday.
Other indicators of stress in Europe’s interbank market have been on the rise, while the inability of the European Central Bank on Tuesday to fully offset bond purchases in a weekly money-market operation offered a further sign that European banks have been hoarding cash amid worries over the spread of the debt crisis and other factors. Read more: ECB fails to offset bond buys amid bank stress.
The central banks said they also agreed to establish temporary bilateral liquidity swap arrangements in order to allow liquidity to be provided in each jurisdiction in any of their currencies if market conditions warrant.
“At present, there is no need to offer liquidity in non-domestic currencies other than the U.S. dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise,” the banks said.
