The coordinated action by central banks in Europe and the U.S. is starting to thaw the frozen credit markets. The London interbank offered rate, or LIBOR, for three-month dollar loans fell 7 basis points to 4.75% on Monday as the Federal Reserves did away with caps on how many dollars it would swap with European banks.
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Determined to grease the wheels of credit markets, the Fed is letting
European central banks borrow as much as they want. The Fed formerly
capped at $380 billion the amount of dollars it would swap with the
European Central Bank, the Bank of England and the Swiss National Bank.
The program will offer the European banks unlimited dollar funds with
maturities of seven, 28 and 84 days at fixed interest rates against
"appropriate collateral."
A Federal Reserve
statement Monday said that:
To assist in the expansion of these operations, the Federal
Open Market Committee has authorized increases in the sizes of its
temporary swap facilities with the BoE, the ECB, and the SNB, so that
these central banks can provide U.S. dollar funding in quantities
sufficient to meet demand.
Still, while the actions taken by the central banks are far-reaching,
their effects have only loosened credit markets by a little bit.
According to Bloomberg the three-month dollar rate is still 325 basis
points higher the Fed's target of 1.5%. Last Friday, the
difference hit a record 332 basis points, spurring action on both sides
of the Atlantic over the weekend. -
George White
See Bloomberg story
See Federal Reserve statement
