As European Nations Teeter, Only Lenders Get Central Bank’s Help

Since the beginning of the financial crisis, the E.C.B. has been lending euro area banks as much money as they want, trying to maintain the liquidity that is the lifeblood of the global financial system.

But because the bank has refused to offer the same service to countries likeItaly, it is not confronting the euroarea’s most fundamental problem. As a result, liquidity is drying up anyway.

In an atmosphere of mistrust reminiscent of the aftermath of the Lehman Brothers collapse in 2008, European banks are demanding higher interest rates for the overnight lending that is essential to keep money circulating. Some, fearing other banks’ vulnerability to the debt of Italy and other beleaguered countries, are refusing to make such loans at all.

But the biggest fear — the one implicit in all the talk of “contagion” and a potential “Lehman moment” — is not that any one bank will succumb to a liquidity crisis. It is that an entire country might do so, if it can no longer obtain the credit it requires to stay in business. Read more at NY Times