For the eurozone, it was another humiliating turn of events. Faced with Europe’s abject failure to sort out its own mess, the US Federal Reserve has been forced to come riding to the rescue instead.
By Jeremy Warner
10:00PM GMT 30 Nov 2011
It wasn’t quite D-Day – Europe is going to require much bigger solutions than the quite limited band aid offered yesterday by the world’s most powerful central bank – but it was the first bit of positive news the single currency has had for some time.
What’s essentially happened is that the Federal Reserve has agreed to step in and provide the cut-price dollar funding to eurozone banks which markets, fearing the worst about the future of the euro, have been refusing.
This funding strike was in turn threatening a second credit crunch, and another cataclysmic collapse in economic activity, with banks calling in their loans wholesale. Indeed, Downing Street said last night that the second credit crunch is already with us.
The move came as key measures of financial stress soared off the scale to some of their highest levels since the Lehman insolvency of three years ago.
Things have come to such a pass that almost any sign of movement by the authorities as the eurozone plunges headlong back into recession is counted a blessing.
Nor were the central banks of the major advanced economies alone in taking action.
Separately, China also moved to ease credit conditions.
Nonetheless, the euphoric reaction of stock markets may have been premature.
Yesterday’s actions help ease the immediate liquidity crisis, and may even buy a little more time, but they do nothing to address the underlying causes of Europe’s gathering sovereign debt disaster.
Furthermore, there appears virtually no evidence to support the assumption in markets that the Fed’s support presages much wider action to get on top of the crisis. On the contrary, the catalogue of half measures proceeded apace on Monday, with European finance ministers finally agreeing proposals to leverage their main bail-out fund, the European Financial Stability Facility, only to find that markets have deteriorated to such an extent that the fund can no longer raise anything close to the sums of money originally intended let alone needed.
Attitudes in the rest of the world to further support from the International Monetary Fund have meanwhile hardened, with the Canadian finance minister,
Jim Flaherty, speaking for many in insisting that the IMF should not be used to bail out rich countries.
With Europe incapable or unwilling to provide the support itself, and continued, apparently intransigent opposition in Germany to alternative European Central Bank action to relieve the crisis by buying sovereign bonds, it remains hard to see where salvation might lie.