Saturday June 20, 2015
The Greek crisis is dominating headlines this week, and promises to be the most important economic and financial topic of conversation through the weekend and into Monday. Neither the Greek government nor the European Central Bank (ECB) seem to be prepared to give an inch, and there’s every indication that things could come to head next week. If Greece does default, and if there is a resulting crisis in European markets, will the Federal Reserve get involved? To quote Sarah Palin, “You betcha!” How would the Fed do this? Read on to find out.
Although the euro is the dominant currency in Europe, a lot of debt in Europe is still denominated in dollars. The dollar being the world’s reserve currency and dollar markets being incredibly liquid, it just makes sense for a lot of companies to do business in dollars. But when a crisis hits and those businesses need dollars, they have to get a hold of dollars somehow. Banks in Europe have a limited supply, and once those dollars are gone, there is no dollar-printing central bank in Europe that can step in. Enter the Federal Reserve.