Liquidity Crisis Looms


Global liquidity is about to dry up, and “the effect on the real economy will soon be felt,” according to Mark Carney, Chairman of the G-20 Summit’s Financial Stability Board and Governor of the Bank of Canada. European banks are afraid to lend to one another because they do not know the extent of their counterparty’s exposure to weak European sovereign debt. Lack of transparency of banks’ holdings and financials is a global problem.

“Global liquidity has fluctuated wildly over the past five years and we are on the cusp of another retrenchment, ” Carney was quoted as saying in speech to the Canada-U.K. Chamber of Commerce, which was focused on global liquidity.

To meet the new Tier 1 capital requirement of 9%, European banks are deleveraging, raising capital, and evidently, not lending it. Central banks are reportedly on standby to “to activate domestic liquidity facilities, if required,” said Jurgen Stark, a member of the European Central Bank’s Executive Board. But he further warned that the European Central Bank’s special liquidity measures were temporary, and that interest rates should not be kept too low and liquidity too high for too long as this could create a new crisis.

Unfortunately, Europe’s problems will almost certainly spread to the U.S. Similar liquidity issues could quickly impact the U.S. economy.

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