EU backstops euro with almost $1 trillion, US joins the fray

The EU has pledged $1 trillion in an attempt to stem its spreading debt crisis. The US is reopening its swap line with the ECB to support a once again fragile international banking system.

Thanassis Stavrakis/AP Photo
An employee of the Greek Stock Exchange walks past a screen in Athens, May 10. Near-bankrupt Greece saw its borrowing costs fall sharply Monday and promised to press ahead with major financial cutbacks and reforms after the European Union unveiled a $1 trillion plan to contain the spreading debt crisis and boost the euro.

Over the weekend, the European Union put into place a nearly $1 trillion plan to help backstop the spreading European debt crisis. As usual, the market’s initial reaction to government intervention is a standing ovation. Nothing moves the Dow higher — up over 400 points — quite like world central banks firing up the printing presses and offering a basically unlimited supply of fiat currency.

Of course, not to be outdone, the king of the fiat currency hill, the US with the reserve currency dollar, has gotten into the act.

This from Businessweek:

“The swaps with the European Central Bank, Bank of England and Swiss central bank will allow them to provide the “full allotment” of U.S. dollars as needed, the Fed said late yesterday in a statement in Washington. A separate swap line with the Bank of Canada will support as much as $30 billion, the Fed said, and the Bank of Japan said it approved reactivating its U.S. line. The swaps were authorized through January 2011…

“…In a swap, central banks exchange foreign currency with an agreement to reverse the transaction at a later date. The central banks will then lend the dollars at fixed rates to firms in their countries. Dollar liquidity tightened in London last week amid concern financial institutions are holding too many assets of Europe’s most-indebted nations.

“The action signals that Fed officials are concerned about implications of the Greek crisis for American markets. ‘These facilities are designed to help improve liquidity conditions in U.S. dollar funding markets and to prevent the spread of strains to other markets and financial centers,’ the Fed statement said.”

For the first time since the financial crisis, the US is reopening its swap line with the ECB to support a once again fragile international banking system. It’s a move that will continue to inflate the Fed’s already hugely bloated $2.33 trillion balance sheet. The swap hit over a half trillion dollars at its last peak in December 2008. Peanuts, really.

You can read all the details in Businessweek’s coverage of how the Fed has restarted its currency-swap tool.

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