NEW YORK (MainStreet) -- With the eurozone debt crisis brewing, the Federal Reserve and five global central banks have rolled out a new program designed to make it easier for major European banks to access cash if they need it.
The program, announced this morning by the Fed, could have a far-reaching effect on not just lenders but also borrowers, who presumably will benefit by getting access to credit from cash-flush banks.
The central banks’ plan lowers the cost of dollar swaps and in the process accelerates cash flow to global banks, especially European lenders smack in the middle of the eurozone debt crisis. In a word, dollar swaps – more formally known as “temporary reciprocal currency arrangements” – are agreements between central banks to keep a healthy chunk of their country’s currency available for other central banks at a fixed exchange rate.
The Federal Reserve move lowers the cost of those transactions and increases the supply of cash to banks and lenders. The Fed says the new pricing models will kick in on Monday and will be extended to Feb. 1, 2013.
But what does it mean to the average American?
Tamping down the economic brushfire in Europe, which is what the Fed is trying to do with this plan, should have a calming effect on the U.S. economy. If European banks ran out of money and had limited or no access to capital, that could easily take down the entire European economic system, as businesses couldn’t get cash to pay their employees, and consumers wouldn’t be able to get credit to buy household goods or obtain mortgage loans.
That could cause a ripple effect across the Atlantic, as nervous lenders and creditors would likely hunker down and limit access to credit until the European crisis played out.
But the news from the financial markets today should quell those fears – at least for the short term. And to further ease any anxiety among American consumers, the Fed takes great pains to say that what’s happening right now in Europe hasn’t impacted the U.S. economy.
“U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets,” the Fed wrote in a press release. “However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses.”
Just call it the “good neighbor” policy: By providing easier access to cash for European Banks, the Federal Reserve, along with the other major global central banks, is buying an insurance policy for the U.S. economy as well.