Fed official: European woes show financial markets 'somewhat vulnerable' despite improvement

WASHINGTON (AP) — Although financial conditions in the United States have improved since the 2008 crisis, events in Europe show their fragile underside, a Federal Reserve official said Thursday.

"The funding markets evidently remain somewhat vulnerable" given the debt crisis in Europe, Fed Vice Chairman Donald Kohn said in a speech in Canada.

That's why the Fed revived a program with other central banks on Sunday to swap currencies, he said. The Fed is lending much-in-demand dollars to other central banks in exchange for their currencies. In turn, the central banks can lend the dollars out to banks in their home countries to prevent the crisis from spreading further.

The Bank of Canada, the Bank of England, the European Central Bank, the Swiss National Bank and the Bank of Japan are involved in so-called dollar "swap" effort.

European banks need dollars to lend to companies across the Continent. European companies that have operations in the U.S. pay their employees in dollars and buy raw materials with the U.S. currency. Also, oil and other commodities are priced in dollars around the world.

The Fed lent the European Central Bank $9.2 billion through the swap operations, the Federal Reserve Bank of New York reported Thursday. No operations were conducted with the other central banks.

The European debt crisis first erupted in Greece and there are fears that it could spread to Spain, Portugal and other eurozone countries. The crisis has pushed up demand for the U.S. dollar and has sharply weakened the value of the euro, the currency used by 16 European countries.

Last week, fears of contagion helped caused Wall Street to swoon. The Dow Jones industrial average dropped nearly 1,000 points before the market recovered two-thirds of its losses.

Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, said the Fed's decision to reopen its swap arrangements was done to protect the United States.

"We didn't do so out of any special love for Europe — we're American policymakers, and we make decisions to keep the American economy strong," he said in a speech to business people in Wisconsin. "But the liquidity problems in European markets were showing signs of creating dangerous illiquidity problems in our country's financial markets," he said. "We knew that the swap lines would be a useful step in heading off that process."

The swap program was opened in 2007 in the early days of the U.S. financial crisis. It was shut down in February as financial conditions in the United States and abroad had shown signs of improving.