Eurozone banks have found themselves unexpectedly counting calories — in dollars. The European Central Bank’s chief economist, Philip Lane, has sounded the alarm: if dollar funding suddenly tightens, credit to the real economy could shrink fast.
The secret lies in the balance sheets — or rather, off them. Banks have built up a hefty pile of off-balance-sheet commitments denominated in dollars, a kind of “currency diet” with the tangible risk of sudden starvation. Add to that unstable funding sources, and you get a potent recipe for financial stress.
Philip Lane explained that sudden shifts in dollar liquidity can make banks feel as if they are on a financial seesaw — one where keeping balance becomes nearly impossible. As a result, lending to households and businesses could thin out sharply, which looks like grocery prices suddenly doubling overnight.
To sum up, Europe is standing at the threshold of a currency famine in its banking sector. If the US dollar becomes scarce, the economy could face a shock and might soon start saving on daily basics.
