Central bank deal should remind eurozone leaders of looming disaster

Thursday, December 1, 2011
By Paul Martin

So much for moral hazard. Ben Bernanke, chairman of the US Federal Reserve, has decided he can’t wait any longer for dithering eurozone politicians to sort out their problems.

By Damian Reece
30 Nov 2011

The warning signs of an impending European banking collapse, which would have global implications, cannot be ignored any longer.

Eurozone money supply has been contracting recently in an eerie echo of the events contributing to the 1930s Depression. American money market funds, a crucial source of liquidity, have been fleeing back home and leaving European banks without access to dollars to refinance their liabilities. Investors have been getting so nervous of collapse that they have sent bond yields on short-dated German bonds negative, paying Berlin to hold their cash.

Over the past week the central banks have been holding conference calls chaired by Sir Mervyn King, the Bank of England’s governor, to agree a plan to answer the increasingly loud distress calls of the European Central Bank.

The cheap dollar facility announced on Wednesday should allow European banks to refinance liabilities coming due and stop any falling over a la Northern Rock, but on a continental scale.
The coordinated action reveals the deep concern Bernanke, a keen scholar of the Great Depression, and his fellow central bankers have for the immediate future.

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