Another breakdown of the interbank market is therefore very unlikely.

A probable cause of the collapse of the interbank market is precisely informational failure.

This is what happened in the eurozone when the interbank market first broke down in mid 2007.

By contrast, modern banks would seek finance mainly in the interbank market and securitize their loan portfolios.

In London and New York, the interbank market is still working nevertheless, there is reason for concern.

The Emerging Market Currency Rout

European and other international banks had acquired a lot of dollar denominated assets which they habitually funded in the interbank market as the market dried up, they were forced to buy dollars.

Instead, by weakening safety standards, bailing out foreign investors, and financing current account deficits, the ECB has undercut and replaced the private European interbank market.

This includes such factors as home market growth constraints, liberalization and currency appreciation.

The G 7 action plan aims to restore the flow of credit by securing interbank lending, and coordinated central bank actions have provided unprecedented levels of liquidity to the market.

In theory, such banks should be immune to runs, because the interbank market is supposed to be extremely efficient, and risk would be shifted to investors willing to bear it.

The case for capital market integration, and then for a single currency, was similar.

The interbank market has almost collapsed, because banks do not trust each other in the same way that we tend not to trust an eager seller of a second hand car.

For a growth starved US, the opportunities of market access far outweigh the currency threat.

Market turbulence demonstrates a need for some institutional mechanism that can ensure greater currency stability.

Banks in the eurozone came under pressure, and interbank tensions increased.

If Europe has a single market and a single currency, it needs a single bank regulator.

The euro was created partly in order to bolster internal market efficiency and prevent currency volatility.

Interbank relationships, as well as investment banking operations, are already highly international.

Certainly, governments should not guarantee interbank liabilities that do not affect customer deposits.

For this reason, it is simply not possible to run a currency union of separate countries without market discipline.

One possibility is a gradual, market determined erosion of the dollar as a reserve currency in favor of the euro.

As for the US, it makes little sense to support dollar currency pegs in any large emerging market, at least until its trade balance normalizes. This is no time for oil currency hypocrisy.

The current crisis killed off this optimistic scenario. The interbank market has almost collapsed, because banks do not trust each other in the same way that we tend not to trust an eager seller of a second hand car.

At the time, Delors presented the introduction of a single currency as a way to complement or complete the Single Market.

That led to the next step Foreign firms wishing to invest in China were allowed to tap those deposits by issuing renminbi denominated bonds, and eligible offshore financial institutions were permitted to invest renminbi funds in China s interbank bond market.

But they attribute this to market psychology and irrational trading, not to the attempts of currency traders to interpret changing macroeconomic fundamentals.

In addition, the single currency weakens the market signals that would otherwise warn a country that its fiscal deficits were becoming excessive.

As the head of the PBOC, he has favored more market based monetary policies and increased internationalization of China s currency, the renminbi.

This model served as a template for the European Union s architects, notably for the creation of a unified market and a common currency.

When the heads of the EU s member states met in Brussels to deal with the Greek crisis, the interbank market, which is decisive for the liquidity of financial institutions, had started to freeze, just like after the collapse of Lehmann Brothers in September 2008.

But what would happen then? There has always been a debate about whether it is possible to have a single market without a single currency.

Likewise, we must move far more quickly towards market driven currency valuations around the world and towards addressing the massive indebtedness of many developed countries.

Oil prices are set in a world market, and depend mainly on the quantities demanded and supplied by different regions, not the currency of payment.

Indeed, the logic is self fulfilling as more foreign currency flows into the market, the economy will continue to overheat, necessitating further interest rate hikes.

These measures will fail to reduce interbank spreads significantly, because monetary policy cannot address the core problems underlying the crisis.

In May 2006, the fairly free domestic interbank rate was just 1.62 , while the US Federal Funds rate was 5 .

While the onshore and offshore renminbi markets remain decoupled, the start of renminbi settlement under the trade account enables Hong Kong s offshore renminbi (CNH) currency market to coexist with the onshore (CNY) market, leaving significant room for arbitrage.

And even if dollar prices were to be replaced by euro prices, the impact of single currency pricing on the oil market would be the same.

Policymakers in many emerging market countries worry that surging capital inflows will drive up the value of the local currency, destabilize financial markets, and fuel economic overheating.

The central bank has maintained a stable currency by intervening directly in the market, as well as low inflation, and succeeded in maintaining investors' confidence in debt.

As a result of these efforts, the renminbi has emerged as the second most used currency in trade finance, overtaking the euro, and the fifth most used for international payments. Moreover, it is increasingly preferred in currency market transactions and official foreign exchange reserves.

Recent moves toward renminbi internationalization, a more open capital account, and wider currency trading bands leave little doubt that the endgame is a market based, fully convertible renminbi.

The final question is what such a eurozone banking union would mean for the single financial market, and especially for EU countries that are outside the single currency.

Delays in enterprise restructuring and failure to develop a well functioning capital market played major roles in Czech economic troubles, which culminated in a currency crisis in May.