Central Banks Riding to the Rescue

Naturally, the ECB and the Fed have been perfectly aware of the recent signs of stress in Europe's financial markets as dollars have been withdrawn, moved, and otherwise made increasingly unavailable to European financial institutions. Today they decided that they had to take action:

ECB to Lend Dollars to Euro-Area Banks

The European Central Bank said it will lend euro-area banks dollars in three separate three-month loans to ensure they have enough of the U.S. currency through the end of the year. The European Central Bank said it will lend dollars to euro-area banks in a series of three-month loans as the region’s debt crisis limits market access to the U.S. currency.

The Frankfurt-based ECB said it will coordinate with the Federal Reserve and other central banks to conduct three separate dollar liquidity operations to ensure banks have enough of the currency through the end of the year. The three-month loans are in addition to the bank’s regular seven-day dollar offerings and will be fixed-rate tenders with full allotment, the ECB said in a statement today. They will be offered on Oct. 12, Nov. 9 and Dec. 7.

The euro jumped more than a cent against dollar after the announcement and traded at 1.3865 at 4:13 p.m. in Frankfurt. Treasuries fell, pushing 10-year yields up the most in more than three weeks, as demand for the safest assets eased.

“This tackles one small problem in the market at the moment,” said Chris Scicluna, deputy head of economic research at Daiwa Capital Markets Europe in London. “Ultimately, until there’s a more comprehensive response to the sovereign debt crisis, which has been feeding into concerns about the health of European banks, the strains in Europe’s banking sector will continue.”

And this is exactly how the world's central bankers will be earning every penny of their salaries over the coming months, I think: by doing everything they can to keep the gears of the financial markets running as smoothly as possible in the face of enormous risk and uncertainty. They can't make risk and uncertainty disappear, but they can do a lot to prevent them from causing unnecessary damage.