[D66] Central banks seek to avert global meltdown,By Nick Beams

[Antid Oto]

Central banks seek to avert global meltdown
By Nick Beams
1 December 2011

Yesterday’s move by six major central banks to boost liquidity for European
banks makes clear there is a growing fear in leading financial circles that the
eurozone crisis threatens to set off a meltdown of the entire global financial
system.

The emergency action, led by the US Federal Reserve, will cut the interest rate
on dollars loaned to European banks. They have been hit by the withdrawal of
funds and the drying up of credit because American and other banks fear that
European authorities are losing control of the situation.

In another sign that the crisis is spreading, Chinese authorities yesterday cut
the amount that the nation’s banks must set aside as reserves—the first such
move since 2008.

The intervention by the Fed, together with the European Central Bank (ECB) and
the central banks of Japan, Britain, Canada and Switzerland, boosted share
markets around the world. Wall Street’s Dow Jones index rose by 500 points in
its biggest one-day rise since March 2009.

While providing short-term relief, the measures have done nothing to overcome
the underlying crisis, which is one of insolvency, not liquidity.

Jon Peace, head of European bank research at the Japanese finance house Nomura,
told the Guardian: “It is an evolution of the crisis from three years ago, when
countries took on the risks of the banks. Back in 2008, there was a lender of
last resort—countries bailed out the banks. This time it is governments that
need a lender of last resort—but there is no obvious lender of last resort.”

Three years ago, the major concern about the stability of European banks was
their exposure to dubious asset-backed securities, much of it sold to them by US
finance houses. Today, the source of concern is the banks’ exposure to sovereign
debt—the bonds issued by the governments of the eurozone.

Welcoming the central banks’ move, the Financial Times (FT) pointed to the
dangers facing the American banking system. It warned that a lack of investor
confidence in the European banks was “squeezing the dollar-denominated parts of
eurozone balance sheets. If this sparked a fire sale of dollar assets, contagion
could spread to US banks.”

Serious as this problem was, the FT warned that the “real worry” was tight euro
funding, with interbank loans and unsecured funding drying up in the euro area.
In other words, there was an ever-present danger that European financial markets
would simply freeze up.

On Tuesday, eurozone finance ministers agreed on detailed plans to boost the
European Financial Stability Facility (EFSF) with increased leverage. Their
actions could well be likened to lecturing on navigation while the ship goes
down. Such is the reluctance of banks, governments and finance houses to place
any money in Europe that there is no prospect of the EFSF receiving sufficient
funding to even begin tackling the crisis, let alone resolving it. Barely a
month after the leverage plan was first announced, the EFSF is being described
as “yesterday’s solution.”

The central bank action was accompanied by series of warnings about the
financial and political implications of the eurozone sovereign debt crisis.

France’s central bank governor, Christian Noyer, told a conference in Singapore:
“We are now looking at a true financial crisis—that is, a broad-based disruption
in financial markets.”

The breakup of the eurozone, once considered unthinkable, is being taken
increasingly seriously. In Britain, the Financial Services Authority, while
insisting that it is not predicting a collapse, has told UK banks to draw up
contingency plans for such an eventuality.

In a speech yesterday, European Economic and Monetary Affairs Commissioner Olli
Rehn warned the European parliament of the longer term implications of the
collapse of the eurozone. “The economic and monetary union will either have to
be completed through much deeper integration or we will have to accept a gradual
disintegration of over half a century of European integration,” he said.

The truth is that the European powers have no possibility of unifying Europe.
One of the central causes of the current crisis is the widening of the divisions
between them in the wake of the global financial breakdown that began in 2008.

In the short term, pointing to the European leaders’ summit on December 9, Rehn
said the European Union faced a “critical period of 10 days to complete and
conclude the crisis response.”

The differences remain as wide as ever, however. The two key powers of the
eurozone, France and Germany, are deeply divided. The French government of
President Nicolas Sarkozy wants the ECB to act as a lender of last resort for
beleaguered European governments, while the German government of Chancellor
Angela Merkel fears this will simply mean that Germany has to bail out the other
European governments and be dragged deeper into the crisis itself.

In a newspaper interview, French Foreign Minister Alain Juppe warned of the
long-term consequences if a solution were not found. Echoing remarks on Monday
by Polish Foreign Minister Radoslaw Sikorski, that the breakup of the eurozone
could have “apocalyptic” consequences, Juppe said Europe faced an “existential
crisis.” The collapse of the euro could trigger “the explosion of the European
Union itself.”

“In that eventuality,” he added, “everything becomes possible, even the worst.
We have flattered ourselves for decades that we have eradicated the danger of
conflict inside our continent, but let’s not be too sure.”

While Juppe’s comments were intended to apply pressure to Germany to accede to
French demands for greater action by the ECB, there is no question that the
crisis contains the potential for economic and military conflict in Europe.

Moreover, as yesterday’s central bank intervention makes clear, there are fears
that a breakdown in Europe will hit the rest of the global financial system
virtually overnight.

http://wsws.org/articles/2011/dec2011/bank-d01.shtml