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A fistful of dollars

Central banks injecting liquidity was a smart move but does that mean a Greek disaster lies around the corner?

Dollars, lovely dollars, come and get ‘em. It was a sensible move yesterday by the world’s big central banks to provide three-month loans to inject liquidity into the banking system. US money market funds appear to be reluctant to lend to European banks, so somebody has to do the job.

One fewer headache is welcome, and those betting on catastrophe know that the authorities will not sit idly. The market’s reaction was understandably positive – stock markets rose, led by French banks, and the euro rallied.

But the development is hardly reassuring in the grander scheme of things. Central banks normally launch these co-ordinated operations only when disaster has struck – as after the collapse of Lehman Brothers three years ago – or when disaster looms. The mischievous thought is that the authorities are seriously worried Greece could default on its debt at any moment.

The more charitable interpretation is that the central banks are creating some breathing space. If so, the trick is to ensure that it is used to good effect. That means that the eurozone must inject more capital, not just extra short-term liquidity, into the banking system.

Will the banks play ball? It’s up to the central banks and politicians to ensure they do. Alongside yesterday’s carrot, they should apply a stick by telling financial institutions to prepare for a Greek storm that cannot be deferred indefinitely. © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds