Bottom Line: " ...this doesn't address the risk to their overall solvency."
The Bank of Canada and five other central banks around the world are making a co-ordinated effort to improve the flow of money through the global economy.
The Bank of Canada, the European Central Bank, U.S. Federal Reserve, Bank of England, and the central banks in Japan and Switzerland pledged to cut the rate on what's known as "dollar swap lines." That's the amount of money that banks pay in order to get their hands on different currencies so they can then loan them out to customers.
In plain terms, the plan is to make U.S. dollars more available by lowering the rate at which the world's banks have to borrow to get their hands on U.S. dollars.
Foreign banks get U.S. dollars by borrowing them from their own central banks, which then get them from the U.S. Federal Reserve.
Because of the uncertainty in the economy, other banks have been less willing to loan anything to European banks. That means the latter have to pay a premium to get the cash, and that's ultimately passed on to consumers.
The premium that European banks must pay to get short-term U.S. dollar loans rose to 162 basis points recently. That's the highest they've been since Lehman Brothers collapsed in 2008.
After a speech to a business audience in New York, Finance Minister Jim Flaherty said, "One of the things that we see when there's a great deal of uncertainty is a tightening of credit and that has been a challenge particularly with respect to U.S. dollars and some of the European financial institutions."
The Bank of Canada, the European Central Bank, U.S. Federal Reserve, Bank of England, and the central banks in Japan and Switzerland pledged to cut the rate on what's known as "dollar swap lines." That's the amount of money that banks pay in order to get their hands on different currencies so they can then loan them out to customers.
In plain terms, the plan is to make U.S. dollars more available by lowering the rate at which the world's banks have to borrow to get their hands on U.S. dollars.
Foreign banks get U.S. dollars by borrowing them from their own central banks, which then get them from the U.S. Federal Reserve.
Because of the uncertainty in the economy, other banks have been less willing to loan anything to European banks. That means the latter have to pay a premium to get the cash, and that's ultimately passed on to consumers.
The premium that European banks must pay to get short-term U.S. dollar loans rose to 162 basis points recently. That's the highest they've been since Lehman Brothers collapsed in 2008.
After a speech to a business audience in New York, Finance Minister Jim Flaherty said, "One of the things that we see when there's a great deal of uncertainty is a tightening of credit and that has been a challenge particularly with respect to U.S. dollars and some of the European financial institutions."
Flaherty reiterated that on the broader question of sovereign debt, Europe is rich enough to help itself and should not seek help from the International Monetary Fund, often called the bank of last resort for poorer economies.
World stock markets soared on the news...although experts say the fundamental problems of massive sovereign debt loads remain.
"It does not address the heart of the crisis, which is the risk European banks will have to take further writedowns on sovereign debt and have to pull back on activities in euros," CIBC economist Avery Shenfeld said.
"It does not address the heart of the crisis, which is the risk European banks will have to take further writedowns on sovereign debt and have to pull back on activities in euros," CIBC economist Avery Shenfeld said.
"So this doesn't address the risk to their overall solvency."
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