By Marcus Leach
“Despite an overly euphoric reaction by global equity markets and a buoying of both the Euro and Sterling, concerted action yesterday by key central banks has done nothing to solve the ever deepening crisis in the Eurozone. The plan unveiled by the Federal Reserve in the US and a number of key central banks across Europe including the Bank of England is aimed at making it easier and less expensive for banks to obtain US dollars and maintain liquidity," he said.
“The move does show that there is the will to work together. However we should all remember that last time such cooperation was shown on this scale was in the immediate aftermath of the collapse of Lehman Brothers - it's likely that this round of assistance signals the deep concern of central bankers and policymakers that a EU bank or number of banks was likely to fail without such support.
“The move will likely relieve pressure on cash strapped financial institutions only in the very short term. What it fails to do is address the underlying problems that face European Countries and their commercial banks alike - namely that there is simply not enough money available in the leveraged European Financial Stability Fund (EFSF) to bail out the likes of Italy in the event of default. Until the perception of the Global Financial Market is that there is a big enough pot to bail out all the troubled economies of the EU, there will always be a reluctance to lend to the banks with exposures therein.
“The harsh reality is that only the ECB and IMF have access to such funding and there looks little in the way of political will from either to act as a 'lender of last resort'.
“Yesterday’s action coupled with recent musings from Germany and France surrounding the possibility of fiscal integration without the agreement of all member states is the most compelling evidence yet of widespread and influential concern that the Euro could collapse imminently without radical change. A 'two-tier' Eurozone looks likely to be the compromise of choice. This would allow the stronger economies to stay in the club whilst giving the weaklings the much needed room to devalue their currencies in order to increase their competitiveness in international markets and 'trade' themselves out of trouble.”
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