http://www.marketwatch.com/story/global-central-b…
"In Wednesday’s action, 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 as the U.S. dollar overnight index swap rate plus 50 basis points. "
Does this mean that Europe will be able to trade their currencies for the USD at a cheaper rate?
Also, "Under the program, the Fed lends dollars to other central banks in return for their currencies. The foreign central banks then use auctions to lend dollars to financial institutions under their jurisdiction."
The European central banks will be auctioning off USD or what is going on here??
"In the operations, the ECB will effectively meet all requests by institutions for one-week or three-month dollar loans in return for collateral"
So basically the ECB will be providing loans in exchange for stakes in the institutions, would this be similar to U.S. in the 2008 financial crisis when they were buying bank stock for loans?
A general explanation of the situation in layman's terms would also be greatly appreciated.
i dont think the ECB loans will be in exchange for stakes in the institutions. I'm assuming they would be government bonds or something like that.
They are buying up debt that nobody wants. And they do so by creating credit out of thin air.
It is a world wide quantitative easing = more inflation
Wow. It's actually hard to be this wrong. Well done, sir.
So they are buying eurozone debt with USD?? But they are getting USD at a discounted rate compared to the average FX trader?
The central bankers are decreasing the swap rate of the dollar by 50 bps, so ECB can borrow dollars at a cheaper rate. ECB is not allowed to directly buy up bonds from the troubled countries. WHat it can do is to lend to the IMF, who will in turn lend to the countries in need. These countries take USD to pay off liabilities that are denominated in USD.
In essence, the central bankers, with the Fed included, are not bailing anyone out. Credit risk is limited as collaterals are required. It's just global monetary easing, which may or may not crush the dollar in the long run.
it's a swap, so what it means is that the fed will swap USD for EUR with the ECB. And more importantly the way this is structured is that the Fed will bear no counter party risk and whatever is being drawn on the swap line and lend out to european banks by the ECB will bear interest that is payable to the Fed. Also the swap have an end date that they will swap back the swap line amount at the exact same exchange rate when it was drawn so in this case the Fed also have zero exchange rate risk as well.
If you ask me, this is a fucking genius idea as it bears practically no risk on the Fed's side and they are just minting money from the ECB.
the ecb is technically not allowed to buy bonds of the peripheral countries, but they're doing it anyway in small amounts
Basically a ton of banks (particularly European) have liabilities denominated in USD, which means they require USD cash to keep up with them. The problem is that USD cash has become increasingly expensive to attain (f/e ccy swap points mostly moving to the right in say EUR/USD). Basically, the market has become less willing to lend USD cash vs EUR, etc. Enter the Central Banks trying to alleviate this pressure and allow Euro-banks who are stressed from all angles to have an easier time meeting their USD denominated liabilities.
This isn't quantitative easing or anything like that. Likely the reason this was put in place was because they all realised at current USD funding levels some big-name banks could be in serious trouble, but that's just my guess.
Does it change anything? No not really, there are still too many problems to count. It does, however, help to buy the banks potentially facing a liquidity crisis some time.
My 2 cents.
Above explained it well. It is not QE it is mainly a way to make sure banks keep lending to each other and credit does not shore up. So the LIBOR-OIS don't blow out.
That said look at 2008, this is the first step to agreeing on some form of QE. The banks did the same thing right after Lehman, clearly in 2008 they were way too late to the game. This time around they are putting an end to the issues before a Lehman occurs.
Not sure it will really make much of a difference beyond the immediate-term without the major problems being addressed in Europe... not even sure there is an answer for those problems. I might be a bit more pessimistic than my peers tho.
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