Some have been asked why the Fed recently provided dollar loans and swaps to Europe. Applebaum explains that the short answer is maturity mismatch. European banks invest heavily in the US based on short-term funding. That funding dried up as those providing it became concerns about the banks.
The European banks get short-term funds in euros and convert them to dollars. But this funding recently went directly into dollar instruments like Treasuries as capital fled the euro. Thus the banks were caught short of funding to meet their short-term obligations in USD. So the fed obliged with the dollars.
Read about it at The New York Times
Why Do Foreign Banks Need Dollars?
By Binyamin Appelbaum
(h/t Mark Thoma)
2 comments:
Tom,
Is this a good thing? Why? Why not?
@ abella,
If it's just a temporary liquidity issue, not problem. But if TPTB in the EZ don't deal deal with this incipient crisis expeditiously, it could turn into a solvency issue, which would be very bad.
Government can mask financial sector insolvency for some time by providing liquidity, but it's not a fix.
Eventually what has to happen in the the EZ, UK, and EZ will happen. Debt that cannot be repaid will not be repaid. Right now the "solution" is to squeeze blood from stones. It's not viable politically, as growing social unrest is showing.
At some point the central banks and financial sectors of the affected countries are going to have to recognize reality, or their economies will continue to stagnate and populations will become more restive, until some shock crashes the house of cards.
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