Federal Reserve Opens Credit Line to Europe
WASHINGTON — The Federal Reserve late Sunday opened a program to ship U.S. dollars to Europe in a move to head off a broader financial crisis on the continent.
Other central banks, including the Bank of Canada, the Bank of England, the European Central Bank and the Swiss National Bank, are also involved in the effort.
The action reopens a program put in place during the 2008 global financial crisis under which dollars are shipped overseas through the foreign central banks. In turn, these central banks can lend the dollars out to banks in their home countries that are in need of dollar funding to prevent the European crisis from spreading further.
The Fed said action is being taken “in response to the re-emergence of strains in U.S. dollar short-term funding markets in Europe.”
The debt crisis first erupted in Greece and there are fears that it could spread to Spain, Portugal and other eurozone countries. The crisis has pushed up demand for the U.S. dollar and has sharply weakened the value of the euro, the currency used by 16 European countries.
The Fed said the action was being taken to “prevent the spread of strains to other markets and financial centers.”
The Bank of Japan will be considering similar action soon, the Fed said.
A so-called “swap” line with the Bank of Canada provides up to $30 billion. Figures weren’t provided for the other central banks. The arrangements are authorized through January 2011.
The Fed had wound down these crisis-era programs with other central banks in February, along with other emergency programs to get lending flowing more freely again and return stability to financial markets. At that time, financial strains in the United States were easing, and the Fed began to take steps to move policy closer to normal.
It also had begun to lay out a plan to reel in the unprecedented stimulus money pumped out during the crisis. The Fed’s balance sheet ballooned to $2.3 trillion, more than double where it stood before the crisis struck. The program reopened on Sunday will expand the Fed’s balance sheet, economists say. However, the program poses little credit risk to the Fed because the arrangements are with other central banks, they added.