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Bid to stabilize world financial system seen as a temporary fix
Question of the Day
It will take more than that to bring down unemployment in the U.S., which has been stuck at about 9 percent for more than two years, but the U.S. has added jobs for 13 months in a row. The government’s next read on unemployment comes out Friday.
In Europe, countries like Ireland, Portugal, Spain, Greece and Italy overspent for years and racked up annual budget deficits that have left them with backbreaking debt. Italy alone owes €1.9 trillion, or 120 percent of what its economy produces in a year.
The ECB extends unlimited short-term loans to banks. It cannot lend directly to governments, including by buying their national bonds. It can, however, buy national bonds on the secondary market, lowering borrowing costs for governments.
The ECB has resisted expanding even this indirect support because it believes that would take the pressure off politicians to cut spending and reform government finances, a concern known as moral hazard.
European leaders are considering other options, including creating a fiscal union — giving a central authority control over the budgets of sovereign nations. That would ease the ECB’s concerns.
The ECB has also worried that injecting too much money into the European economy would trigger inflation.
The coordinated action was a demonstration of how interconnected the world financial system is, and that the debt loads of countries like Italy and Greece are everyone else’s problem, too.
Germany’s economy depends heavily on exports, and if economic output in the rest of Europe collapses, the people of smaller countries couldn’t buy as many German goods.
Across the Atlantic Ocean, the United States depends on Europe for 20 percent of its own exports. And investors in American banks have worried about their holdings of European debt.
Standard & Poor’s, the credit rating agency, lowered its rating at least one notch Tuesday for the four largest banks in the U.S. — Bank of America, Citigroup, JPMorgan Chase and Wells Fargo.
China, one of the only places in the world where the economy is growing quickly, needs the U.S. and Europe both to stay healthy. Growth in Chinese exports has declined from 36 percent in March compared with the year before to 16 percent in October.
China will reduce the amount of money that its commercial lenders must hold in reserve by 0.5 percentage points of their deposits. It was the first easing of Chinese monetary policy in three years.
• Wiseman reported from Washington. AP Economics Writer Martin Crutsinger contributed from Washington.
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