Five central banks have agreed to currency swap lines that enable the Federal Reserve to provide foreign currencies to U.S. financial institutions.
The Federal Open Market Committee has authorized new temporary reciprocal currency arrangements (foreign currency liquidity swap lines) with the Bank of England, the ECB, the Bank of Japan, and the Swiss National Bank. If drawn upon, these arrangements would support operations by the Federal Reserve to provide liquidity in sterling in amounts of up to £30 billion, in euro in amounts of up to €80 billion, in yen in amounts of up to ¥10 trillion, and in Swiss francs in amounts of up to CHF 40 billion.
Add:
Q: What does it mean?
A: So far the funding shortfall was thought to be largely a USD problem, the C.B.s are telling us loud and clear, it isn’t.
tv:
first, sorry for the delay approving your post, been away and embedded links require human intervention.
Back to Buiter, he is DEAD WRONG on that one, a shortage of usd would make the usd go up, and the previous swap were to counter that, the new swap addresses a potential funding shortage in foreign currencies for us banks (mostly in london).
The wording of the press releases could have been better but here is one that’s very clear from the swiss national bank:
( capitals mine ), link here, last paragraph:
http://www.snb.ch/en/mmr/reference/pre_20090406/source/pre_20090406.en.pdf
Why on earth would American banks need euro loans when they have no (or more properly very small) euro asset books to fund? Eurozone, Swiss, and UK banks, by contrast have gigantic USD asset books which are not naturally funded by USD deposits. There is no euro shortage in America, but there is certainly a dollar shortage in Europe.
One of the great unexpected ironies of this crisis will be, against all expectation, a massive nominal appreciation of the dollar against its would be rivals. The dollar will emerge from this crisis with its status as the global reserve currency more firmly entrenched than ever before. And all the tedious, highly consensus, and endlessly repetitive predictions of a dollar collapse will result only in negative P(L), especially if expressed via a long EURUSD position.
Read the buiter article http://blogs.ft.com/maverecon/2009/04/why-did-the-fed-the-bank-of-england-the-ecb-the-bank-of-japan-and-the-swiss-national-bank-announce-a-dubbel-openslaande-porte-brisee-deur/
I still stand by my analysis above.
Hello, Bueller…..I mean Buiter: “It is conceivable – the statements are worded quite clumsily – that the April 6, 2009 announcement is about swap arrangements additional to the swaps previously announced (on February 3, 2009). In that case, the size of the swap arrangements has effectively been doubled. The redundancy objection disappears, but the misleading framing objection continues to apply in spades. If this is indeed the case, my concerns (explained below) about the fate of the US dollars provided by the Fed in the original swaps are strengthened.
The second strange feature is that the April 6, 2009 statement by the Fed is misleading. It is clearly phrased to convey a sense of the Fed needing foreign exchange (euros, yen, Swiss francs and sterling) to provide this foreign currency liquidity to US financial institutions. That is rhubarb. The US dollar shortage abroad continues today in much the same way as on February 3, 2009 or on September 18, 2008. Financial institutions in the US can get foreign exchange liquidity quite readily from the US subsidiaries of Euro Area, British, Swiss and Japanese banks. They don’t need the Fed for that.”
YES! Thank you.
This doubles the original bet. The orginal bet stays around 300Bln; That bet is illiquid. Period. If the Fed really wanted those foreign currencies, what prevents it from netting this now 312 bln (H.4.1) swap? Its illiquid. I wonder if its just gone in a big black hole. Buiter suggests that is a risk.
I suggest the risk is real and that this ends up on the taxpayers plate and the Fed can fry for the “appropriation” and taxpayer liability. This was just a big shell con from the Fed to “market” its swap this way. More of the same swap….
Buitter in the FT says this is artfully-obscured preparation to bail the UK out.
There are no U.S. foreign currency borrowers who need to be bailed out….
but there are massive foreign deposits on the books of the majors. foreign capital may finally be repatriating.
iirc, this is fundamentally different not for the CBs but for their constituents. fed will now be capable of granting euro loans to american banks.
I have to agree with TV above, jck. In form and substance, these new “reverse” swap lines are no different from the original swap lines. As tv explained, in both cases the Fed buys foreign currency from foreign central banks, and supplies them with dollars in return.
Indeed, it is a laughable notion on its face that the Fed needs euro, swiss, sterling, or yen liquidity at all, having recently acquired approximately half a trillion (dollar terms) of these very same currencies in the first swaps. In any event, the BIS data show that it is European and UK banks and corporates who are far more likely to have borrowed in dollars, rather than U.S. companies who might have borrowed in euros or sterling (remember when the dollar was a one way bet lower?..who wouldn’t want to borrow in dollars). There are no U.S. foreign currency borrowers who need to be bailed out….American spendthrifts ran up their debts in good old American dollars, of which the Fed of course has an unlimited supply.
In any event, given all the currencies at issue are freely convertible, if the U.S. for some reason needed foreign exchange, why not just buy it on the open market. This would of course drive down the value of the dollar, and drive up the value of euro and sterling. Somehow, I think the ECB is more concerned about a strong euro than the Fed is concerned about a weak dollar (I thought creating inflation was the whole point of QE)?
No, this is the same old wine in a new bottle. Europe borrowed too many dollars, invested them in risky assets which have blown up, and continues to face a dollar shortage. This latest swap line smokescreen is clever marketing to conceal the fact that the euro is taking on water and needs the Fed’s continued liquidity support. It is cover for an organized devaluation of the euro while paying lip service to the G20′s pledge of “no competitive devaluations.”
Foreign depositors withdrawing funds from Citi et. al in sufficient quantities?
reverse swap line agreement means that the us dollar is worth alot less today than it was yesterday.The trust in the dollar is not as high as it once was.
humm….where are short-term Swissy rates? How are those too-large for SNB banks doin’ these days?
when we give them dollars they take the credit risk of re-lending the dollars to their banks and the fed has central bank credit risk, and it means the foreign banks have trouble funding in $.
This is the reverse, the U.S. banks may have trouble funding their euro, pound, whatever foreign currency book.
before: We gave them dollars, they gave us their foreign currency
Now: They give us more of their foreign currency, we give them more dollars as the swap.
At the end of the day, we hold more foreign currency, they hold more dollars
This is NOT the same thing than the Fed $ swap lines.
Previously the Fed was providing $ to foreign central banks so they could bailout their own banks short of $ funds, this is the reverse, foreign central banks provide foreign currency to the Fed so it can, if needed, bailout U.S. banks short of foreign currency funds.
what is different about this than the origination of these swap lines nine months ago or so?
What? The marketing of them?
Before the US was providing, now the US “is accepting”
Nothing changed except in the marketing of a new massive line and US taxpayer liability when these the swapped currencies go south.
Were back up to our old swap line highs.
I suspect that the banks in the UK, Switzerland, and most of the EU are seriously overleveraged and now insolvent because they bought too much US mbs. Their governments want the US to fund their bailouts too, as the source of the problem. The US, able to reach into bottomless pockets, is complying.
Fake banking:
Show us the money – http://www.youtube.com/watch?v=283UiAMk_As
I agree…seems to be a backdoor for buying T-bills/bonds. What else would keep the US going, and the many wars we pride ourself on. Maybe Ben is selling bonds in the alley somewhere in Central Asia….who knows.
I don’t think so, although the Q.E. experiment in the U.K. looks like it’s backfiring badly. See this:
http://ftalphaville.ft.com/blog/2009/04/06/54516/fixing-the-gilt-market/
The U.S. has the worst CDS spreads for bank debts and given the “creditors should take a hit” mantra, some banks may have difficulty rolling fx paper, this is relatively small for U.S. banks but still, better have a plan just in case U.S. megabank XYZ experience a run in euros or pounds or whatever.
Doesn’t look reassuring…”they” know something that we don’t.
IS this not just a backdoor way of ensuring that govt bond auctions don’t fail? Ie PPIP for sovereigns?