Nervous banks have been charging each other more and more to turn their euros into dollars, creating an incipient liquidity crisis

Eurozone crisis: the graph that shows why the central banks had to act

If there was any doubt about the need for the intervention of the world's central banks to try to avoid a new credit crunch, the chart above tells it all.

Capital Economics explains that eurozone banks have had trouble being able to get funds in dollars, which is why the Bank of England joined the Federal Reserve, the Bank of Japan, the ECB, the Bank of Canada and the Swiss National Bank in taking measures to make it easier for banks to obtain dollars.

The line on the chart is a bit complicated. But Capital Economics explains.

"Until Wednesday, banks were willing to loan euros in exchange for dollars for three months and receive an interest rate of Libor less 150 basis points on the euro, versus paying an interest rate of Libor flat on the dollars. That spread shrunk following the central bank's latest pledge but remained around 130 basis points – far higher than the old rate which banks were prepared to lend dollars".



The upshot is that banks have been charging each other more and more to turn their euros into dollars and that the rates have been reaching levels close to those when Lehman Brothers collapsed in September 2008. Hence central banks decided to act.

But, Capital Economics cautions:

"Welcomed as the news was, we do not think it signals a turning point in the crisis. After all the dollar funding in the eurozone is symptomatic of a broader liquidity squeeze. And even if banks in the eurozone have less of a liquidity problem on their hands today than in they did in late 2008, they have a greater solvency problem".