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The liquidity consequences of the euro area sovereign debt crisis

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  • William A Allen
  • Richhild Moessner

Abstract

We examine the liquidity effects of the euro area sovereign debt crisis, including its effects on euro area banks as a group, on intra-euro area financial flows, on the supply of and demand for collateral, and on international liquidity. The lending capacity of the euro area banking system has been much weakened, despite the remarkable growth of the operations of the Eurosystem, including its greatly increased lending, its intermediation between national central banks in surplus and deficit countries and its collateral policy. The euro crisis has also created international liquidity stresses. We find that central bank swap lines have only had limited effectiveness in alleviating the stresses, probably owing to some stigma being attached to their use.

Suggested Citation

  • William A Allen & Richhild Moessner, 2012. "The liquidity consequences of the euro area sovereign debt crisis," BIS Working Papers 390, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:390
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    References listed on IDEAS

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    1. Baba, Naohiko & Packer, Frank, 2009. "From turmoil to crisis: Dislocations in the FX swap market before and after the failure of Lehman Brothers," Journal of International Money and Finance, Elsevier, vol. 28(8), pages 1350-1374, December.
    2. William Allen & Richhild Moessner, 2010. "Central bank co-operation and international liquidity in the financial crisis of 2008-9," BIS Working Papers 310, Bank for International Settlements.
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    4. William A. Allen & Richhild Moessner, 2011. "The international propagation of the financial crisis of 2008 and a comparison with 1931," BIS Working Papers 348, Bank for International Settlements.
    5. Naohiko Baba & Ilhyock Shim, 2010. "Policy responses to dislocations in the FX swap market: the experience of Korea," BIS Quarterly Review, Bank for International Settlements, June.
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    8. Moessner, Richhild & Allen, William, 2012. "International liquidity provision and currency-specific liquidity shortages," Journal of Financial Transformation, Capco Institute, vol. 34, pages 31-41.
    9. William A. Allen & Dr Richhild Moessner, 2011. "The International Liquidity Crisis of 2008–2009," World Economics, World Economics, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 12(2), pages 183-198, April.
    10. Naohiko Baba & Robert N McCauley & Srichander Ramaswamy, 2009. "US dollar money market funds and non-US banks," BIS Quarterly Review, Bank for International Settlements, March.
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    Keywords

    Financial crisis; liquidity; foreign exchange swaps; central bank swap lines;
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