A coordinated effort on the part of the world's Central Banks to flood liquidity into the global financial system just a new form of quantitative easing, a Fed tool to fuel growth, says Tony Crescenzi, Executive Vice President at Pimco, the world's largest bond fund.
The U.S. Federal Reserve, the European Central Bank and the Central Banks of Canada, Britain, Japan and Switzerland have agreed to lower the cost of dollar swap lines, a move that aims to make it easier for banks in Europe to get access to dollars.
The Central Banks say in a joint statement that cutting interest rates on the swap lines — short-term loans in this case denominated in dollars — will prevent a credit crunch from striking the global economy, especially in Europe.
"All dollars, no matter where they are deposited, whether it be Kazakhstan, Japan, or Mexico, wind up back in an American bank. This means that any time a foreign central bank engages in a swap with the Federal Reserve, the Fed will create new money in order to make the swap," Crescenzi writes in a CNBC blog.
"Some observers will therefore say that the swap line is a backdoor way to engage in more quantitative easing."
The Fed has rolled out two rounds of quantitative easing since the recession by purchasing $2.3 trillion in assets held by banks with the aim of avoiding a vicious cycle of deflation and also to fuel a stock-market rally and with it, hiring.
Critics says such policies cheapen the dollar and threaten to push up inflation rates.
For Crescenzi, Europe can enjoy the flood of liquidity for now, but leaders must make tough political decisions involving enforcing tough austerity measures on their neighbors and propping them up financially as well.
"The provision of liquidity is no substitute for other actions that Europe must take to solve its current woes. The world continues to wait on European actions on fiscal rules, discipline, and enforcement as well as use of the balance sheet that matters most in the current situation: the European Central Bank," Crescenzi says.
Many analysts agree the rate cut on swap lines gives policymakers some wiggle room but doesn't fix the problem.
"It's been clear for some time that funding in the dollar market has been drying up," says Richard Batty, investment director at Standard Life Investments in Edinburgh, according to Reuters.
"Reducing funding costs and making more liquidity available is helpful. But the solvency issue remains."
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