6 Horsemen? Central Banks Dollar Liquidity Only Prolongs The Euro Debt Crisis

December 8, 2011 16:27

Until there’s a fundamental and structural change of how government is held accountable for running and managing a nation’s resources, there could be more crises similar to the one in the Euro Zone popping up to the point of one Scary Grandioso–No more spare bailout capacity.

By EconMatters Monday, December 5, 2011

Stock markets soared after the coordinated actions on Wed. Nov. 30 from six central banks around the world — the Federal Reserve, European Central Bank (ECB), and the central banks of Canada, U.K., Switzerland, and Japan — to provide “temporary U.S. dollar liquidity swap arrangements.” Those dollar swap lines and programs are authorized through 1 Feb. 2013.

Whenever there are six central banks acting in concert, it typically suggests something serious either already taken place or underway. Some analysts and market experts speculate that there could be a run on European banks, and an imminent collapse of the euro.

But the show of force by central banks propped up stocks, commodities rallied, and yields on most European debt also fell. The dollar swaps made it cheaper for banks to borrow dollars in emergencies, and is meant to ease the credit crunch in the financial markets, business, and individuals, instead of a “bailout” of the Euro Zone.

One latest development reported by Reuters is that Germany’s Finance Minister Wolfgang Schaeuble intends to present at a crunch summit of EU leaders on 9 Dec:

“Each of these countries should put into a special fund that part of its debt which exceed 60 percent of its GDP, and should pay that off with tax revenues. Over a period of 20 years, the debt should be reduced to 60 percent,” he [Schaeuble] said.

Schaeuble believes his proposal, which has won qualified support from Chancellor Angela Merkel, would boost confidence as states would be sending a signal they were serious about limiting debt levels to 60 percent of gross domestic product.

At first brush, it seems more of a wishful thinking that Schaeuble’s plan would “boost confidence” of investors. The separation of excess debt to be paid off with tax revenues over 20 years, while symbolic, does not really change the fiscal fundamentals leading to the current crisis in the region–sluggish growth, high debt with a significant portion maturing in the next five years, and the prospect of renewed recession, including Britain and Germany– as illustrated by the interactive charts from The Economist (updated 12 Nov 2011).

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