ankers to the rescue? On Wednesday, the West's major central banks launched a coordinated effort to prop up the floundering eurozone. Essentially, the banks moved to lower the cost of loans by making more dollars readily available, all in an attempt to help stave off a credit crunch. "At last, somebody does something!" says Tim Worstall at Forbes. Many investors shared that sentiment, and markets shot up on the news. The Dow Jones Industrial Average surged an incredible 490 points — its best day since March 2009. But will the banks' revised monetary policy do much beyond simply delaying the inevitable? Here's what you should know:
What exactly did these central banks do?
The U.S. Federal Reserve, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank are making it "cheaper for banks around the world to borrow U.S. dollars," says Annalyn Censky at CNN Money. The bankers lowered prices on dollar liquidity swaps, meaning the Fed can lend money to other central banks at a lower rate than in the past, and those central banks can then lend the dollars to banks in their countries "that are having difficulties funding themselves," says Neil Irwin at The Washington Post.
Why are they doing this?
European banks are facing a credit crunch, and may need access to more U.S. dollars to meet their financial obligations. Now it's "easier for the ECB and thus European banks" to borrow the money they need, says Joe Weisenthal at Business Insider. "These liquidity facilities could come in handy if Europe's debt crisis" gets so bad that banks would otherwise struggle to immediately get "the funds to continue normal business transactions," says Censky.
So... is the euro crisis over?
No. While Wednesday's move "greases the wheels," says Richard Quest at CNN, "it does not address the fundamental problems of the eurozone." Several countries still face crippling debt crises that threaten to bring down the entire eurozone. Lower lending rates will help reduce acute liquidity problems, but this is merely a band-aid. Europe still lacks a "credible, long-term solution to the crisis." How true, says Worstall. All this means is that "we're not going to have a disaster while the politicians fumble around for a few more weeks."
Europe is still in crisis, says Olli Rehn, Europe's Commissioner for Economic and Monetary Affairs, and really, the eurozone only has about 10 days to get its act together. Indeed, says Kent Cherny at New York. Expect "the frantic pace" to continue as markets keep punishing debt-saddled Italy with higher interest rates, European leaders hash out Greece's latest round of bailouts, and Brussels grapples with all sorts of possible rescue plans.
Sources: American, Business Insider, CNN (2, 3, 4), Forbes, Reuters (2), Wash. Post
- 4 secret societies you probably don't know about
- This is the twistiest tongue twister ever, says science
- The secrets of happy families
- Which professions have the most psychopaths?
- Did God have a wife?
- Diagnosing the Home Alone burglars' injuries: A professional weighs in
- Battle in a blizzard
- How to stick it to the poor: A congressional strategy
- 7 grammar rules you really should pay attention to
- Would you cuddle a stranger for $80 an hour?
Subscribe to the Week