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MAKE MONEY BLOG$~The European rumor mill returned with a vengeance on Thursday, fueling an impressive stock rally during the last hour of trade.
Reports surfaced that major central banks stand ready to provide emergency liquidity to stabilize financial markets if the outcome of Sunday’s Greek national election causes “tumultuous trading.”The news was apparently leaked by high-ranking G-20 officials, as global leaders gathered in Los Cabos, Mexico for their latest summit. Country leaders and their finance ministers will be closely watching the outcome of the Greek elections, which could possibly thrown global markets into disarray if Alexis Tsipras of the far-left Syriza Party pulls off a victory.
In order to avert a possible liquidity crunch, central banks stand ready to inject emergency liquidity, several G-20 officials confirmed to Reuters. Their plan of action would begin with statements suggesting policymakers stand ready to do whatever it takes to ensure stability in the global financial system, but successive steps remain unclear.
The Federal Reserve already has swap lines in place with major central banks in order to provide emergency U.S. dollar liquidity at cheaper rates. Last September, the Fed, the ECB, and the central banks of England, Japan, and Switzerland, agreed to offer unlimited dollar liquidity to banks by broadening the scope of funding opportunities. Specifically, they scheduled three liquidity providing operations with an average maturity of 3 months to help avert a Lehman-like liquidity crunch.
While these currency swap lines are already in place, central banks could hold further bond auctions, allows for currency intervention, and even orchestrate coordinated monetary easing. The latter seems unlikely, though; the last time that happened was in the aftermath of the Lehman Brothers collapse, back in October 2008.
At the same time, jittery markets have been on edge for months, and none of the piecemeal attempts by European policymakers to quell the crisis have helped. Last weekend, the EU announced it was providing Spain up to €100 billion to recapitalize its banks, yet global equities dropped; yields on Spanish 10-year bonds spiked, hitting 7% on Thursday.
Last time around, global central banks didn’t provide liquidity in the face of an actual crunch, rather it was a move to boost morale and market confidence. From a piece I wrote at the time:
The announced intervention aims at bolstering confidence for the Euro banking sector. As Jens Nordvig of Nomura explained, there was no outright U.S. dollar shortage, as the ECB’s U.S. dollar lending facility was hardly being drawn on. ”This is just broadening future funding options for banks, rather than having any large flow impact in the near-term,” explained Nordvig, who added “this may be very important for psychology around banks.”
U.S. money market funds had been drastically cutting their exposure to the Eurozone, thus sucking it dry of of cheap dollar funding. Now, the situation is different. While those same money market funds have cut their exposure to the Eurozone by 63% since end-May 2011, according to Fitch, they have actually increased it marginally (2%) since the end of March.
This time around, though, the possibility that Greece may leave the Eurozone is very real, much more than before. Tsipras has already made it clear he will not join a coalition government with Greece’s major parties, and he has also very publicly denounced austerity, calling it “barbarous.” A win by Tsipras could definitely throw markets off on Monday.
New York-traded global bank stocks rallied on the news. Citigroup, JPMorgan Chase, Goldman Sachs, and Morgan Stanley all experienced a big pop just after 3 PM on Thursday, as did Deutsche Bank, HSBC, Banco Santander, and Barclays.
Not too long ago, rumors coming out of Europe were the main driver of market action. With the chilling of the European sovereign debt crisis, that effect appeared to have gone away. This latest iteration of the crisis, though, seems to have taken hold once again. Markets are setting themselves up for a new round of global liquidity, but, as with any rumor, the possibility of disappointment looms large.
source: forbes.com
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