Central Banks' Promise of Dollars for Europe Won't Stop Greek Default

The Fed and the central banks of Japan, England and Switzerland threw European banks a lifeline yesterday by becoming their dollar lender of last resort. Unfortunately, it is a lifeline attached to nothing.

These banks and the ECB said they will conduct three U.S. dollar liquidity-providing operations. In English, that means a fund where banks can get dollars because other banks and U.S. institutions aren't loaning greenbacks to Europe. The European banks need our bucks to fund loans made in dollars to people and businesses around the world, and for the securities they hold that are denominated in dollars.

This type of thing has been tried before in Europe -- both during the Great Depression and at the height of the financial meltdown. That is not promising.

While not a bad thing, here's why the central banks' effort is like giving aspirin to someone who's about to have his arm cut off:

• This just puts liquidity back into the banking system -- it does nothing about the reason no one wants to loan to Euro banks. That reason is the enormous losses the entire region will suffer when Greece goes into default.
• This is yet another case of borrowing to cover bad loans. The U.S., U.K. and Japanese central banks are already trying to deal with their respective nations being in hock far, far over their heads. There is no reason to think the Euro banks will be in any better position in 90 days than they are now.

The sticking point continues to be a group of nations led by Finland, who oddly want collateral before giving out huge amounts of money. Foolish Finns! Just do what we did and take a lot of worthless real estate. Don't forget, the Parthenon is a priceless treasure.) Although Helsinki is under a lot of pressure to drop this demand, it is unlikely to do so. The current Finnish government is a coalition effort and this position is what holds that coalition together.

With voters in Germany and other northern European nations increasingly agitated at the idea of funding any rescue effort, the countdown to default is now very short.

Image courtesy of Wiki Commons
Related:

• Why China Won't Be Riding to Europe's Rescue Any Time Soon
• Depositors Fast Walking Their Money Out of European Banks
• A Guide to What Happens When Greece Defaults
• Markets Terrified by Greek Attempts to Reassure the Markets About Bailout Plan

Constantine von Hoffman

Constantine von Hoffman is a freelance writer and writing coach. His work has appeared in outlets such as Harvard Business Review, NPR, Sierra magazine, Brandweek, CIO, The Boston Herald, TheStreet.com, CSO, and Boston Magazine.

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