The illuminated euro sign is seen in front of the headquarters of the European Central Bank (ECB) in Frankfurt April 5, 2011.KAI PFAFFENBACH
Markets rallied Wednesday on news that a bunch of central banks have co-ordinated easier access to the Federal Reserve's stash of U.S. dollars. Until February, 2013, these banks will have to pay just half a percentage point above the U.S. dollar overnight index swap, or OIS, to borrow greenbacks short-term.
As the Globe's Kevin Carmichael pointed out this morning, the move should reassure investors that the banks will have easy access to cash for the foreseeable future. So even though European countries are having trouble raising new debt, the ECB will be able to exchange its own stash of euros with the Federal Reserve's pile of U.S. dollars in order to backstop European banks.
That these swaps exist shouldn't be all that surprising for investors. According to the Federal Reserve's transaction history, the European Central Bank has been exchanging U.S. dollars since September, and it relied heavily on the Fed for greenbacks when sovereign debt worries first flared up in the spring of 2010.
In fact, what has been swapped so far this year is tiny compared to the levels seen in 2010. During some weeks in May, 2010, the ECB borrowed more than $9-billion in U.S. dollars to meet its short-term funding needs. To date this year, its maximum weekly total is $2.3-billion. It's just that now the ECB can do this for less money.
It should also be noted that neither the Bank of Canada nor the Bank of England have swapped U.S. dollars with the Fed in the past year and a half.
The latest co-ordinated central bank move was designed to "ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity."
Tim Kiladze