Countries that share the euro face “a critical problem of confidence” in the long-term sustainability of fiscal accounts for some nations, said Steven Kamin, the Federal Reserve Board’s Director of International Finance.
Euro nations also face doubts about their near-term liquidity and the stability of their banking systems, he added.
“It is incumbent upon European authorities to address all these issues, and indeed they have taken a number of steps on all three fronts,” Kamin told a House Oversight and Government Reform subcommittee, where he testified with New York Fed President William C. Dudley.
Asked about the solvency of the European financial system, Kamin said “some subset” of investors has doubt about solvency “even if perhaps a broader class of investors is more confident.”
“That is why it is critical in this situation where liquidity is at issue to bolster confidence,” Kamin said.
The Fed cut the cost of emergency dollar funding for European banks as part of a globally coordinated central-bank response to the continent’s sovereign-debt crisis last month. Dudley told the subcommittee that the swap lines help insulate U.S. markets from European pressures and support the supply of credit.
The interest rate was reduced to the dollar overnight index swap rate plus 50 basis points, or half a percentage point, from 100 basis points, and the program was extended to Feb. 1, 2013, the Fed said Nov. 30. The Fed coordinated with the European Central Bank in the program, which was also joined by the central banks of Canada, the U.K., Japan and Switzerland.
The Fed reported $54 billion in central bank liquidity swaps on its balance sheet as of Dec. 14.
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