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Why The Fed Is Extending Its Central Bank Dollar Swap Lines

Tyler Durden's picture


Two days ago, in a surprisingly vocal announcement to make sure everyone heard it, the Fed extended the duration of its USD FX swap lines with foreign central banks from January (when they were due to expire) to August. One may ask: why the extension when Europe continues to lie that all is good, and when America has made it clear that it is not China, but the US, which will suddenly lead the next global growth spurt (ignore for a second that the recent jump in crude to just under $91 has wiped out virtually the entire benefit from the just passed payroll tax "stimulus"). One may also not get an answer. So while the announcement is nothing but the latest salvo in what is now merely a policy approach to risk asset pricing, the question of what is being achieved from a purely fundamental standpoint is likely somewhat relevant in our brave new centrally planned world. Bank of America provides the explanation to all those for whom the Fed's continuing backstop of Europe is a novel topic.

Extending the dollar swap lines

The Fed extended its dollar swap lines with a number of foreign central banks, including the ECB, to August 1, 2011. Recall that these swap lines - originally due to expire by the end of January - were put in place during the sovereign crisis earlier in the year to ease funding strains from a scarcity of US$ available abroad. Since the lines provide dollar funding through foreign central banks at a relatively fixed interest rate of currently about 120bps1, that effectively caps private market funding rates. After the US financial crisis where dollar swap lines were first put in place in reaction to an ongoing funding crisis, the Fed and foreign central banks reacted more proactively earlier this year before the sovereign crisis led to another funding crisis. Importantly, during the more recent resurgence of the sovereign crisis these swap lines remained in place and helped reduce from the outset market expectations of contagion through the founding markets.  In reaction to the ongoing sovereign crisis today’s announcement extends this fire break for the funding markets well into next year.

How swap lines cap funding costs

During the credit crisis in 2008 the introduction of central bank dollar swap lines was a major contributing factor normalization of the dollar funding markets as seen in Figure 2 below. Basically the swap lines with the Fed allowed the ECB to meet dollar funding needs from European banks directly, alleviating funding pressures in the private market that led to rising LIBOR rates. While the original swap lines were allowed to expire, they were reinstated by the central banks back in May in response to the European sovereign crisis.

The second figure below (Figure 3) shows European private market funding in dollars constructed by borrowing euros at three-month Euribor and converting to dollars using a three-month EUR/USD basis swap. That compares with borrowing dollars directly from the ECB’s currency swap lines with the Fed at the penalty rate of OIS+100 bps. If private market funding (LIBOR-Basis Swap) was to become more expensive o European banks than the dollar swap lines provided through the ECB, these banks would find it more economical to use the swap lines. Thus the swap line penalty rate of 100+OIS effectively becomes a cap on LIBOR-Basis swap.

We see in Figure 3 below that the private market dollar funding cost (borrow Euribor, swap to dollar) has increased recently. This happened mainly due to funding pressures creating a dollar shortage as reflected in the EUR/USD basis swap.

To summarize: the Fed continues to do everything it can to transfer private balance sheet risk to that borne by the US Europe, Switzerland, the UK, Japan and any other place that prints money. 



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Thu, 12/23/2010 - 11:38 | 826091 unwashedmass
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death by a billion cuts.

Thu, 12/23/2010 - 11:41 | 826096 hedgeless_horseman
hedgeless_horseman's picture

Debt by a few cunts.

Thu, 12/23/2010 - 11:46 | 826107 Rahm
Rahm's picture

Death to a few cunts

Thu, 12/23/2010 - 11:50 | 826120 SheepDog-One
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Thu, 12/23/2010 - 11:56 | 826133 jeff montanye
jeff montanye's picture

imo pricks had a lot more to do with this fiasco.

Thu, 12/23/2010 - 12:02 | 826144 TheGoat
TheGoat's picture

Dont kill too many, they are very useful....

Thu, 12/23/2010 - 11:55 | 826124 Sudden Debt
Sudden Debt's picture

You mean death by Chinese overlords!


Thu, 12/23/2010 - 12:01 | 826142 SheepDog-One
SheepDog-One's picture

BAH! Fuck the Chinese, bitchez can go to hell.

Thu, 12/23/2010 - 14:27 | 826527 rocker
rocker's picture

While I agree, the point is, they now own the FED and the majority U.S. citizens.  We are slaves to China now.

The FED does as they dictate.

Thu, 12/23/2010 - 15:02 | 826629 jakethesnake76
jakethesnake76's picture

Whoes in charge of China and don't tell me some Bankster cause i'd just have to ask whoes behind him or her , point is there is (Something) behind all of this that wants to subjegate the whole system and Man to itself ..( to speak in eastern parlence)  :)

Thu, 12/23/2010 - 12:10 | 826162 Liars Poker
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Visit my site , I have a very good trading strategy that I would like to share. Tell me what you think. If you think you can benefit, please join!

Thu, 12/23/2010 - 12:15 | 826170 Cindy_Dies_In_T...
Cindy_Dies_In_The_End's picture

This should be rather obvious: it is needed because the counterparty risk of the TBTF in the EU requires it.


Don't you all feel better now? Nothing like a huge clusterf...

Thu, 12/23/2010 - 14:17 | 826501 Cdad
Cdad's picture

Well Tyler,

Based on today's absolutely and flagrant intervention on the Euro dollar, I guess we know the answer to the question in the headline of this story.

Alas, I did not position for Ben Bernanke to go ahead and use my dollars to gamble on the Euro today...even though you had clearly given me the head's up here.

I wonder when Americans will finally say enough is enough and at least, stop pissing away money on Christmas bobbles, and maybe at most simply giving up being part of the crony economy?  Huh?

Some day we will learn the answer to that, and maybe someday someone in the FBI or in the SEC or in the fill in the blank with any number of zombie, flesh eating fed idiot agency will DO THEIR JOB!  Ready....everyone hold your

Thu, 12/23/2010 - 15:22 | 826677 Cdad
Cdad's picture


Thu, 12/23/2010 - 12:40 | 826215 jus_lite_reading
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I quote you Andrew Jackson, one of America's founding fathers:


Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves.

Thu, 12/23/2010 - 15:07 | 826645 jakethesnake76
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That Man  had a Pair :) not like the bitches and crying leaders in there today..

Thu, 12/23/2010 - 11:42 | 826098 BlackSea
BlackSea's picture

Just buy the universal store of value.

Clearly, nasty depreciation (against that store of value) is in store for all currencies mentioned in the article above.

Thu, 12/23/2010 - 11:45 | 826099 Rahm
Rahm's picture


Thu, 12/23/2010 - 11:43 | 826101 Perseid.Rocks
Perseid.Rocks's picture

BOHICA Bitches.. bet yer ass is so sore you won't even feel it this time..

Thu, 12/23/2010 - 11:44 | 826104 sheeple
sheeple's picture

whoa gold got slap in the @$$ big time today

Thu, 12/23/2010 - 11:47 | 826111 Dr. No
Dr. No's picture

?  down $10 bucks.  Approx .7% change.  Big time?  dont think so.

Thu, 12/23/2010 - 11:53 | 826123 SheepDog-One
SheepDog-One's picture

Big time? Hardly half a percent. Fine, Im going Christmas PM shopping anyway with my bonus, give me lower prices! I'll trust physical gold in my hand over criminal thief banksters any day.

Thu, 12/23/2010 - 12:01 | 826141 sheeple
sheeple's picture

i got mine last wk, i'm poor (in terms of fiat) as hell

Thu, 12/23/2010 - 11:56 | 826127 Carl LaFong
Carl LaFong's picture

buying opportunity....remember, buy LOW, sell HIGH....not the other way around.

"Paper money eventually returns to its intrinsic value, ZERO"  Voltaire 1729

Thu, 12/23/2010 - 11:59 | 826136 SheepDog-One
SheepDog-One's picture

Or in this present case, buy all time highs, sell higher or maybe cant sell at all Monday!

Thu, 12/23/2010 - 12:35 | 826209 TheProphet
TheProphet's picture

Voltaire actually used the word intrinsic? Can you send me the source of the original quote?

Thu, 12/23/2010 - 15:41 | 826733 merehuman
merehuman's picture

zimbabwe as a trend setter, who could have known....

Thu, 12/23/2010 - 11:48 | 826115 Oh regional Indian
Oh regional Indian's picture

Did the petro-dollar die and no one told me? When? That was almost a fire-wall at some point, was it not?

Now, with clear and announced outflow's of newly minted zeros from the Fed to the over-Fed, shouldn't Oil price be gyrating lower in dollar terms? In fact, as the dollar gyrates lower in real terms, does said  lowering get inflated? In dollar terms?

With so many more dollar zeros now than 6 months ago, why is it so steady against the rupee? Shouldn't it be crashing? Are even "free" and "floating" (loaded, that word) currencies "priced"/"valued" (take your pick) by policy or by the market?

Am I totally off on a tangent here?

Cui bono? What is this global dollar flood pretending to extend?

Is this why Onion prices in India are up 200% week/week?

Inflation exportation, literally?

I'll go smoke a beedi now and wait for some wisdom/junks.



Thu, 12/23/2010 - 11:56 | 826128 Cleanclog
Cleanclog's picture

Just yesterday, an Australian friend was railing about America exporting inflation to them.  Said prices and wages going up and dislocating quickly.

Thu, 12/23/2010 - 12:12 | 826163 TheGoat
TheGoat's picture

WTF, AUD above parity with USD. That would imply US has higher inflation than Aus, Inflation here is still mainly in one asset class, you know houses only ever go up. Stupid Aussie mega mortgage mugs, glad I cashed out of that circle jerk. Lets all get rich by selling our houses to each other for ever increasing prices, idots, rental returns here are already about 2 - 4% and prices 6 to 9 times annual income.

Housing only ever goes up, now were have I heard that before.....

Thu, 12/23/2010 - 12:07 | 826135 SheepDog-One
SheepDog-One's picture

Well, for that to happen, would oil markets have to believe all those new strings of zero's have some kind of actual VALUE?

Dollar chart seems steady, but things that are bought with the dollar are shooting up, oil, commodities (except PM's but thats a different story) while the dollar appears 'stable' it takes a whole lot more of em to buy things. Isnt that pretty much inflation?

Seems to me the more they move the decimal points to the right, the higher oil goes because no one believes the BS, its dilution and Arabs arent too easily fooled since before camel trading days.

Thu, 12/23/2010 - 12:53 | 826251 Oh regional Indian
Oh regional Indian's picture

Thanks for your usually incisive insight SD1. 

And funny, I was thinking about them camel traders and how th eworld takes them for dupes.

They were masters of the oceans and the deserts.

Would not bet against them.

Plus, many of them have Indian advisors. Ha!


Some kind of double-double behind-your-back international skulduggery is about to unfold.


Thu, 12/23/2010 - 11:51 | 826118 apberusdisvet
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So now it should be crystal clear to even the dumbest ass out there that the FED mandate is for its wealthy owners and the worldwide banking cartel and certainly not for the American people.  The sheeple have been thoroughly indoctrinated and propagandized to place all of our economic woes on either R or Ds, while the FED incrementally steals our remaining wealth.  The current pumpathon in the markets can only end badly.  Those that can connect the dots are already out.

Thu, 12/23/2010 - 11:56 | 826130 SheepDog-One
SheepDog-One's picture

Indeed, how the fuck can people be this STUPID to believe theyre being benefitted while anyone with a brain can easily see the elaborate plan to ensure their complete and total bankrupting and perpetual debt slavery? Baffling.

The avg american moron even if shackled ankles and wrists with a metal collar chained around their necks would believe 'Its all good!' as long as theyre walked past a TV once a day and shown the DOW is up!

Thu, 12/23/2010 - 12:12 | 826164 irishgurl4
irishgurl4's picture

First post here ...

I ask myself this same question every day.  I try and educate people but they think I'm nuts at this point.  The typical response is "but the TV said things were getting better!" or "it's all the (insert political party here)'s fault."  Fine, believe the idiot box but don't come crawling to me begging for help when the house of cards finally collapses.  I warned your ass and you didn't listen.

Thu, 12/23/2010 - 12:35 | 826210 KickIce
KickIce's picture

Exactly my sentiments.  Meanwhile, the Germans are filling up safety deposit boxes with PMs as they've already lived this nightmare.

The average American refuses to believe it can happen here, despite the financial freedoms we are losing daily to say nothing of the enslaving legislation that is currently running through DC.  As long as food as cheap and DWTS and ESPN are on the idiot box, they're good to go.


Thu, 12/23/2010 - 12:14 | 826169 Divided States ...
Divided States of America's picture

Dont think the FED will ever raise rates...even to fend of inflation. They will be using the stock market as the NEW mechanism in their fight on inflation...meaning they will tell their wall street buds in advance what they intend to do and then cause the markets to tank...I am not sure about a crash because they need to get the sheeple to chase their tails a few more times before they close up the shop for good. By not raising rates also, they prevent all the people under water on mortgages they got into since mid 2009.

Thu, 12/23/2010 - 12:39 | 826213 Caviar Emptor
Caviar Emptor's picture

Not sure you realize what a dangerous game that would be. Crashing the market, as we have seen, is an extremely costly thing to reverse. Once the genie is out, it takes years and trillions to undo the damage done in the span of a few weeks. Fed also uses (wrongly) the stock market indices as a reflection of America's health and vitality. They don't want foreign investors to pull up the tent and park in China. Which they will. Raising rates is still a very tepid, and totally reversible policy decision. Greenspan managed to engineer the mother of all stock bubbles while raising. 

Thu, 12/23/2010 - 13:15 | 826302 Divided States ...
Divided States of America's picture

They can crash and prop whenever they wish now...The Fed's third mandate which is quite obviously now is control of the stock market.

Thu, 12/23/2010 - 11:59 | 826138 plocequ1
plocequ1's picture

I guess the Fed has more room to play.  They won. The Taxpayer, Charts and mathematics lost. Does it really matter anymore?

Thu, 12/23/2010 - 12:05 | 826146 SheepDog-One
SheepDog-One's picture

Will be interesting to see what happens in CA, NJ, and Ill now that BAB's is dead and the unemployment checks stop next month. The real problems come when the bonds puke, and theyre entering the vomitorium right now.

Thu, 12/23/2010 - 12:14 | 826159 plocequ1
plocequ1's picture

In the words of Arthur Jensen.. The world is a business. There are no nations, There are no Peoples. There is only AT&T, GE and Exxon. That was said in the 1976 movie network. God, How true it is.

Thu, 12/23/2010 - 12:07 | 826153 Caviar Emptor
Caviar Emptor's picture

The Fed didn't win so much as they have set in motion the opposite of what they were hoping for, soon to bite them in the ass and forcing yet further policy errors.

Thu, 12/23/2010 - 12:09 | 826158 SheepDog-One
SheepDog-One's picture

Good point, exactly...they didnt intend for this to happen and theyre now chasing the game, not controlling it.

Thu, 12/23/2010 - 12:03 | 826143 snowball777
snowball777's picture

Some central banks are more central than others.

Thu, 12/23/2010 - 12:05 | 826149 Caviar Emptor
Caviar Emptor's picture

The new cold war: China and US compete to take on new debtor nations.

Thu, 12/23/2010 - 12:08 | 826157 The Profit Prophet
The Profit Prophet's picture

Trichet channels the Beatles:

"When I find myself in times of trouble, Ben Bernanke comes to me

Speaking words of wisdom...QE 3"

"And in my darkest hour, he is standing right in front of me

Speaking words of wisdom...QE 3"

"QE 3...QE 3,...QE 3...QE 3.....there will be an answer...QE 3"

Thu, 12/23/2010 - 12:10 | 826160 Caviar Emptor
Caviar Emptor's picture


Thu, 12/23/2010 - 12:16 | 826168 Azannoth
Azannoth's picture

I wonder what the gold chart will look like at QE33


The Fed is obviously following the Japanese model, they figure if the Japs could hold on for 20 years so can we ? ;)

Thu, 12/23/2010 - 12:28 | 826192 rlouis
rlouis's picture



"QE to Infintiy and Beyond"   Buzz Light Year

Thu, 12/23/2010 - 18:24 | 827080 Shylockracy
Shylockracy's picture


Thu, 12/23/2010 - 12:42 | 826225 doolittlegeorge
doolittlegeorge's picture

China "bails out Europe" while "America kills it with kindness."  And Ireland "throws another few billion down a rat hole."  Talk about "banker first" enomics!  The question amazingly is "who who represents the State in time of War will actually represent the military?"  This PARTICULAR war BEGAN when "New York City was annihilated."  I don't recall "New York City retaliating"--at least "not until 2008."  And it didn't appear to be "retaliating against the Taliban but those fighting the Taliban."  So again "where was the recession again"?  Needless to say "commodities including oil keep rising" so "it would appear the recession was in the debt markets."  And of course "that's what the government is demanded be bought."  So that "they can issue more debt" such that "more debt can be bought" such that..."they can issue more debt" such that "more debt can be bought"--and ironically "Wall Street via the media calls this good news."  Well..."we must have a boat load of good news on the way then."  If only such behavior hadn't come on the heals of the 90's when we had surpluses with no wars I guess--then again maybe it's because of it.  What was the Star Trek movie where "the guy would destroy a Planet in order to be caught up in some sort of interstellar phenomenon"?  Something that "takes you back in time"?

Thu, 12/23/2010 - 12:42 | 826226 ForWhomTheTollBuilds
ForWhomTheTollBuilds's picture

"the Fed continues to do everything it can to transfer private balance sheet risk to that borne by the US taxpyer..."


Back when Greece was being, er, "helped" by the IMF I read that Canada contributed about half a billion dollars.   This means that Canadian citizens lose that money either because they have to pay higher taxes down the line (including interest costs since they borrow the money) or through a debased currency.


This is where I start to have trouble with the imminent "end of the world" theories because while the logic is impeccable, the paragraph above describes the mechanism by which the collapse can be staved off by transferring all the accumulated and future productivity of the citizens of every nation to the elites who threaten collapse as the only alternative.


So the amount of time we have left is determined by the amount of surplus to be found anywhere on the globe.  Is there any reason to believe that slack is going to be exhausted very soon (like the next 3 years)?



Thu, 12/23/2010 - 12:54 | 826252 doolittlegeorge
doolittlegeorge's picture

the problem is that "the War not only fails to sweep it under the actually pulls the rug out from underneath you."  This is "the Battle Royale" as they say or in "more technical terms" we call it "geo-political risk."  "Turning the war off is like trying to turn this Doolittle guy off."  It just doesn't stop as they say!  So "these folks talk finance" but "i'm talking the War."  There are many things you "don't have to pay for."  War is not one of them and in particular THIS WAR.  Again THAT INCLUDES WITHDRAWING FROM THE WAR.  To sum up "I don't believe World War II began with legislation telling people your taxes will be reduced" nor "do I recall Wall Street celebrating this should it have been a fact."

Thu, 12/23/2010 - 12:42 | 826227 TheEmperor
TheEmperor's picture

<evil cackle> "Gooood...Good, with each day you become more my servant".

Thu, 12/23/2010 - 12:46 | 826232 Caviar Emptor
Caviar Emptor's picture

QE is just a further extension of the same Fed policy in force since the 1980s. 

Thu, 12/23/2010 - 12:50 | 826242 Tic tock
Tic tock's picture

What is it..the plan will be successful or everyone will die of starvation?'s not working, it isn't even close to working. Do you want to see a gloabel revolution, do you want to see your armed forces slaughtering their families? money, money, money - BUT NOT ONE SINGLE SOLUTION. In other news, Central Banking does not work. 

Thu, 12/23/2010 - 12:59 | 826267 doolittlegeorge
doolittlegeorge's picture

not well that's for sure.  Of course "they're grown girls so they can handle it."  "Free market capitalism" as they say--just don't call the phucking cops cuz you're not paying them either.

Thu, 12/23/2010 - 13:07 | 826282 Oh regional Indian
Oh regional Indian's picture

All the solutions you need.

Right here:

But most, even here, are so wedded to paradigms, they cannot see what I'm saying for what it is. Most just hide behind a rude comment or call me crazy.

What was that someone once said about truth and it's self-evidence the third stage of acceptance?

Maybe the 100th monkey is here.



Thu, 12/23/2010 - 13:14 | 826303 sschu
sschu's picture

There was a ZH article yesterday talking about the Euro risk and how shorting the Euro was a clear money making play. 

If we consider that the European banking risk is the next canary-in-the-coal-mine and that this risk has ramifications for the US financial markets (in a negative direction), then it makes sense that Bennie etal will do everything to prevent a Lehman type meltdown in Euro land.

It is somewhat unclear to me why a Euro meltdown has such negative consequences for the US markets, but I will take Tyler at his word.  Insight would be appreciated.

The European issue is political, not financial IMHO.  Germany's intransience and the disparity in European economies (compare Greece to Germany using the same currency) implies the solution is based upon dissolution of the Euro or socialization of Portuguese debt to Bavaria.  Sure do not see either as probable.

Dollar to Euro parity?  I cannot see Bennie letting it happen.


Thu, 12/23/2010 - 13:21 | 826321 Tic tock
Tic tock's picture

Not at all. and it's not a game when an unlimited pot with no risk at stake sits down to play. This isn't stabilising the market, this is gaming the market, there's a not very subtle distinction. This isn't about the Central banks and the majors not acting at arm's length, this about using unlimited pools of money for the worst of possible reasons. This vaunted ability to swap currency is about one thing only - protecting bank's, again, from their complete and utter failure to adjust their business in accordance with situation in both the real economy and the sentiment in the financial community. If a Central Bank felt the need to do this again, it would; it is Unanswerable with Unlimited power, tell me how this is an organization which could work?

Thu, 12/23/2010 - 23:31 | 827506 ViewfromUnderth...
ViewfromUndertheBridge's picture

In response to sschu above:

The "why save 'em" is very clearly explained by London Banker:

The default of a single (Zone A OECD) European country would implode every bank on the planet due to Basel II.

One of the reasons for the Great Depression was the close inter-relatedness of the world financial system...glad we learnt not to do that again.

The Emperor still has no clothes.

Sat, 12/25/2010 - 13:55 | 829810 sschu
sschu's picture

Thanks!  I will have a look! 

Merry Christmas!




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