Over the past weeks, the world has been growing more and more concerned over the contractions of Europe’s central banks. Earlier Wednesday, the world central banks announced their intentions to improve liquidity. The central banks have started to increase the monetary supply and inject it into the major banks.
The Bank of England, the European Central Bank, the United States Federal Reserve, the Bank of Japan and the Bank of Canada have all agreed to introduce new money into their banks. They hope that doing so will help improve access to credit. According to a speaker from the United States Federal Reserve, these actions should encourage banks to lend more money to struggling businesses and consumers. This should improve business expansion and increase customer spending.
In addition, the central banks are taking all possible steps to improve the accessibility to banking funds. These steps include making liquidity swap arrangements more affordable so that banks can acquire money at lower interest rates.
Critics argue that the central banks plans are a route to disaster. They point out that banks have stopped lending from their reserves, despite holding onto record piles of cash. A lot of that cash has been lent to them by central banks at historically low interest rates. This leaves critics wondering how things will be different this time around.
However, proponents of the central banks’ move feel it is certainly a step in the right direction. The debt crisis that plagues Europe is tightening credit supply and making it more difficult than ever for businesses and customers to borrow money. Without some way to encourage lending, their are major concerns that the world will plunge into a double-dip recession.
The news comes less than a day after S&P announced major ratings cuts for banks throughout Europe and the United States. The rating agency stated that it had major concerns over these banks abilities to repay their debts in the event of a double dip recession. The actions by the central banks may be enough to assuage some of those fears, although they are unlikely to result in higher ratings.
Regardless of the long-term implications of the decision of the central banks, the financial markets consider it good news, at least for the time being. Markets have rallied substantially following the announcement.