Fed’s data dump holds important lessons for Europe
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
The Federal Reserve on Wednesday finally published details of the institutions that clamored for its funds during the financial crisis. It’s hardly surprising that troubled banks like Bank of America, Merrill Lynch and Citigroup topped the charts for banks that lined up for federal money. But the disclosure illustrates the scope of the U.S. central bank’s measures to keep the financial system on life support. The scale of emergency lending — $3.3 trillion at its peak — could hold important lessons for Europe, too.
The Fed’s efforts through 11 different initiatives went well beyond Wall Street. American Express and General Electric were among those that borrowed billions from the Fed’s commercial paper facility, set up on the fly to make sure Corporate America didn’t get swept up in the post-Lehman credit seizure. Currency swap lines also channeled $171 billion in a single day to the European Central Bank as a dollar shortage threatened stability across the Atlantic.
Now, euro zone efforts to stop hemorrhaging in peripheral economies are looking inadequate — and that’s without much sign of a feared spillover into the banking system. The region’s $1 trillion bailout fund, anchored by the European Financial Stability Facility, impressed markets when there was only Greece to worry about. With Ireland already set to get a bailout, largely because of its banks’ weakness, and concerns growing over Portugal and even Spain and Italy, the EFSF-led package doesn’t look like the bazooka it once did.
The ECB has taken other measures of its own. But the euro zone banking system, with total assets of more than 30 trillion euros, is more than twice the size of America’s. The comparison is a very rough one, but against the amount U.S. financial firms needed from the Fed at the peak, even twice the bailout fund’s current firepower looks puny if the crisis intensifies beyond a few sovereign credits and envelops the financial system.
New plans could emerge at the ECB’s meeting on Thursday, with market participants keen to see if it will ratchet up purchases of sovereign debt. Speculation along those lines brought some stability to debt markets on Wednesday, where just the day before risk premiums soared to new highs for Spanish and Italian bonds.
But if things deteriorate badly, it’s hard to see how that kind of move will be enough. Policymakers may need to take a page out of the Fed’s playbook and set up contingency plans for all kinds of life support on a much larger scale.