WASHINGTON – Europe’s worsening debt crisis has been a source of mounting fear and frustration for U.S. government officials and the biggest single threat to the struggling American economic recovery.
On Wednesday, policymakers found an opening to act, with the Federal Reserve coordinating a move by six central banks to give European lenders cheaper access to dollars.
The central banks announced before the opening of U.S. markets that they’d lower the pricing for arrangements in which one central bank swaps its national currency for dollars. The move, which shaves half a percentage point off the borrowing costs, affects central banks, which in turn lend money to private banks. It should make it easier for private banks, especially European ones, to make loans in dollars or to hold securities denominated in U.S. dollars.
The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank all joined the Fed in Wednesday’s surprise action.
The effort, designed to quell fears of a credit squeeze, triggered a huge rally in global stock markets. Markets also were bolstered by the Chinese central bank’s decision to ease monetary policy to support its economy, the world’s second-largest.
No one expects the central banks’ move to end Europe’s crisis. But it was the most positive development in weeks, at least in the eyes of financial markets, in a crisis in which U.S. officials have labored, often without success and behind the scenes, to cajole their European counterparts to take more aggressive action.
President Barack Obama has been making frequent calls to German Chancellor Angela Merkel. Treasury Secretary Timothy Geithner and Lael Brainard, his top deputy for the euro crisis, have been in daily contact with counterparts at the International Monetary Fund, the Fed and European institutions.
The centerpiece of the Obama administration’s strategy has been to push the Europeans to create a bailout fund big enough to limit the crisis to countries such as Greece and Italy. The officials want to make sure that the firewall is strong enough that the core eurozone countries can borrow at affordable rates.
In terms of the size of the fund, the U.S. message, according to one official, has been “Whatever you’re thinking, add a zero.” But Europeans have repeatedly dialed back to significantly less than what the Americans say is needed.
“From the beginning, we have consistently urged the Europeans to build a credible firewall to prevent the crisis from spreading, strengthen European banks and confront the structural issues that are at the heart of the current crisis,” said Brainard, the Treasury’s undersecretary for international affairs.
The situation is all the more frustrating for the administration because it has had little success so far in imparting the lessons learned from the U.S. financial debacle.
“One of the most important lessons we learned from our own financial crisis is that you have to act with force and act quickly in order to get out ahead of markets,” Brainard said.
Fed Chairman Ben Bernanke also has expressed frustration that Europe hasn’t acted more forcefully. His action Wednesday, with the European Central Bank, Bank of Japan and three others, was seen as a collective resolve to avert the credit markets freeze that occurred after the collapse of Lehman Brothers in 2008.