The liquidity consequences of the euro area sovereign debt crisis

BIS Working Papers No 390
October 2012

Published in: World Economics, vol 14, no 1, January/March 2013, pp 103-26.

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.

JEL classification: E58, F31, G01

Keywords: Financial crisis, liquidity, foreign exchange swaps, central bank swap lines