Analysis: Central banks buy wiggle room, not solution

Wed Nov 30, 2011 12:10pm EST
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By Michael Dolan

LONDON (Reuters) - Central bank action on Wednesday to ease severe funding strains for the world's private sector banks may help cushion a brewing global credit crunch but it only buys some wiggle room for governments trying to resolve the euro debt crisis and keep banks lending.

The intervention by top central banks from the world's richest countries -- including the U.S. Federal Reserve, European Central Bank, Bank of Japan and Swiss National Bank -- involved lowering the cost of emergency U.S. dollar funding for banks and expanding currency swap lines between countries.

Although partly aimed at easing seasonal year-end financing conditions in an already stressful environment, the move was an important show of unity among the central banks.

It also reveals the level of international official concern about the threat of the ongoing euro and banking crisis to global economic activity at large and comes the same day as China's central bank eased credit for its commercial lenders for the first time in three years.

The European Central Bank is also widely expected to cut interest rates again next week.

Although the instant market reaction to the moves was positive -- equity, commodities and risky debt markets rallied while the dollar weakened -- the moves underscore the close correlation between the euro crisis and a renewed banking crunch.

They illustrate the fear that both are combining to deliver another double whammy to world growth.

"There was a very dark mood developing at the back end of last week," said Mark Cliffe, chief economist at ING. "With the dire scenarios doing the rounds the last few days, it's all the more important they step in with aggressive measures to support the banking system and show they're beginning to confront the financing problems of the sovereigns as well."   Continued...