Why did the world's central banks coordinate to lower the cost of dollar funding last week?
There were several people who speculated that it was something specific which caused them to act, rather than merely a move to address generally tight conditions.
UBS floor guy Art Cashin has the latest Wall Street buzz. Says Cashin: It all comes back to US money market funds.
A Possible Trigger For The “Swap Rescue” - There is a new theory circulating in Wall Street watering holes about what may have caused the Fed and other central banks to suddenly unite in cutting the cost of dollars in Europe. The move shocked the markets and sent equity prices soaring.
The move puzzled traders and pundits alike. It did nothing to solve or even temper the European sovereign debt problem. It did not shore up Italy or Spain or Greece. Similar moves in the past were reactions to market shocks - like the fall of Lehman- yet there was no visible trauma to trigger this move. A few pundits speculated that the Fed saw a European bank about to collapse and rushed to the rescue. But no one could explain how the rescue worked.
The new thesis in the watering holes seems to tie up the loose ends. It has to do with our old friends, the U.S. money market funds. You will recall that the money funds got caught holding Lehman preferred when it collapsed. That led to a freeze in the commercial paper market and almost brought the U.S. economy to its knees.
The new theory says that several U.S. money market funds have short term loans out to European banks. That paper is said to be coming due in graduated amounts over the next 40 to 50 days. It must be repaid in dollars. So, the thesis goes, the Fed saw imminent danger and rushed to make sure plenty of dollars were available and at a cheaper rate. The peanuts and pilsner crowd think the pressure point may have been in France.
And for a reminder of what the global coordinated intervention was all about, see here.
This story originally appeared on Business Insider
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