Central Banks Boot Europe's Struggling Banks

There was some good news amid the deep concern about Europe's sovereign debt crisis. Coordinated action by central banks, led by the Federal Reserve, provided some help for Europe's struggling commercial banks. Economics editor Zanny Minton Beddoes, of The Economist, talks to Steve Inskeep about Wednesday's surprise coordinated action that calmed global markets.

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STEVE INSKEEP, HOST:

As Europeans try to fix their long term problems, world financial leaders are trying to get through the immediate crisis and calm the markets. We're going to sort through a surprise move that central banks, including the Federal Reserve, made yesterday. Going to talk about it with Zanny Minton Beddoes. She is economic editor of The Economist magazine. And she's become a regular guest on this program.

Zanny, welcome back.

ZANNY MINTON BEDDOES: Thanks very much.

INSKEEP: We heard the headline yesterday, the Fed is going to - and other banks are trying to ease the availability of dollars, of foreign currency. What's the point of this?

BEDDOES: Well, technically what they're doing, is they're going to lower the cost of emergency dollar loans the European banks. What the Fed does is it lends dollars to the European Central Bank via a swap line. And then the European Central Bank lends those dollars on to banks for up to three months.

And what yesterday's action did was to lower the cost of that money somewhat. And the idea is to make it easier for European banks in need of emergency dollars, easier and cheaper to get them.

But I think the real point of yesterday was less the sort of technicalities of what they did, but the symbolic show of force by these central banks saying we are acting together. We've done this before in 2008. Remember, at the height of the financial crisis, they acted together, too. And the idea is that they're hoping to boost confidence this time around, as well.

INSKEEP: OK. So it's just trying to make sure that banks have credit if they get into a crisis situation, because there are so many banks in Europe, especially, that are saddled with government debt that doesn't seem to be all that valuable. But you're saying the basic message here is actually we can do something. Political leaders may be paralyzed, but at least central bankers can act here.

BEDDOES: I think that's very much the goal. And if you look at what happened in the markets yesterday, it seems that they were pretty successful. Financial markets reacted very positively to this notion of central bank cooperation.

But I think the question this time is: Will that be enough? Because if you look at the cause of this crisis in Europe, the cause of the uncertainty, it is uncertainty both about the future of the eurozone and about investor angst about European sovereign debts. And this central bank action, this provision of liquidity can't really solve that problem.

In the end, as your report earlier highlighted, the question is: Will the European central banks step in the short term to alleviate problems for those peripheral countries? And in the medium term, will the Europeans move towards that fiscal union?

INSKEEP: Well, do European political leaders have to prove that they can act, that they can do something in this meeting to go up? Or is this confidence - at least as temporary confidence in the markets - going to evaporate?

BEDDOES: If there is no serious action next week at the meeting on December the 9th, I think the confidence will certainly evaporate. But, as you know, Steve, the story of the past two years has been that, you know, European leaders have these meetings, expectations are raised, and then they do, you know, just enough to ward off catastrophe, but not enough to solve the problem.

So we tend to have very short relief rallies, and then everybody realizes that the European euro debt problem has not been solved, and things - people start worrying again. I think that the issue this time is slightly different, because we really are, you know, at the end of the road. They've kicked this can so far down the road, they can't do it anymore.

And at next week's meeting - because people are now worried about the very future of the eurozone, it's become a kind of existential crisis - they really have to show what direction they're going in. And they have to provide enough comfort for the European central bank to common in the short-term, because that's the only institution in the short term that can really solve this problem.

INSKEEP: You've used that phrase twice now: the future of the eurozone. Are you saying that there is serious concern - I mean, there's been talk for a while, but now there is serious concern that the euro, as a currency, could become to fall apart - come to - start to fall apart, that the countries could leave it.

BEDDOES: Yes, I think a large part of what is happening in Europe now is a flight from the assets of the periphery economies - that's Italy, Spain - well, those economies, because investors are worried about the very future of the eurozone. I think now what people - people used to worry just about those individual economies, and now I think there's a general concern that the Europeans may not be able to hold the euro together.

Now, I think the Europeans, you know, their willingness to go a very long way to keep this European project going makes me confident that, in the end, they'll just about do enough. But I take my - even my confidence is being shaken over the past few weeks. And I think it's - yeah, it's a very real prospect that we have to consider.

INSKEEP: In just a few seconds here, would a collapse of the euro mean a collapse of the U.S. economy?

BEDDOES: If you use the word collapse, then yes, certainly. It depends on how it happens. It depends on whether it's a - whether a chaotic fracturing of the eurozone would cause a global economic calamity.

INSKEEP: Okay.

BEDDOES: A very, very serious one.

INSKEEP: Zanny, thanks very much.

BEDDOES: My pleasure.

INSKEEP: Zanny Minton Beddoes is economics editor of the Economist magazine. And she's a regular guest right here on MORNING EDITION, from NPR News.

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