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Central Banks Renew Currency Swap Lines

CalibratedConfidence's picture





 

On November 30th Zerohedge published material covering the FRBNY FX Liquidity Swap lines and the confusion blatant lying coming from the Chairsatan himself and current headline making Pol, the very misinformed Senator from Tennessee Bob Corker.  As was highlighted then, the FRBNY FX Swap Lines are designed dampen the pressure on short-term funding markets in Europe (though below that facade lies the true purpose of this facility's existence; litigation arbitrage).  As reported by Reuters, global central banks (excluding BoJ for now) have agreed to renew the currency swap lines offered through the US FED for another year.  The purpose of this facility, as described by the FRBNY, is to:

respond to the re-emergence of strains in short term funding markets in Europe. They are designed to improve liquidity conditions in global money markets and to minimize the risk that strains abroad could spread to U.S. markets, by providing foreign central banks with the capacity to deliver U.S. dollar funding to institutions in their jurisdictions.

This facility will continue to be available to the CB's of Canada, England, Europe, and Switzerland.  According to Reuters, the Bank of Japan is holding out on deciding to join and will announce their intentions at the culmination of their December 19-20 policy meeting.  Following the ECB, the Bank of Japan is the next largest participant in the FRBNY Swap Lines.  

 

Since the ECB is largest dependent of US Fiat here are three key charts highlighting the ECB's current situation and going forward watch for material changes here to lead any reports on the tightening of funding markets in Europe:

ECB Deposit Facility:

These data contain ex post data (in EUR millions) on volumes of: 1) open market operations; 2) recourse to the marginal lending facility; 3) use of the deposit facility; 4) autonomous liquidity factors; 5) current account holdings; and 6) reserve requirements.



Benchmark Allotment:

These data contain benchmark allotment amount (in EUR billions) which is the allotment amount in the main refinancing operations that allows counterparties to smoothly fulfil their reserve requirements, taking into account the expected liquidity supply through other open market operations and the ECB's forecast of autonomous factors and excess reserves.

You can see the decline beginning in August 2011 as a result of the US Debt Ceiling mess.  As a reminder, February 2012 was the month the ECB drew its largest amounts on  a weekly basis ($89.1 billion to $89.6 billion).


 

Current Account:

 

After a substantial wind down in the FRBNY FX Swap Lines since Q1 2012 it would appear that conditions have improved globally, aside from the obvious which is how insolvent Sovereign Governments will fund their ever expanding nanny states.  As Zerohedge also noted in July, the drop off in the deposit facility does not mean that money is being put to good use but merely that it has shifted to the Current Account.  CB's are expecting further turmoil regarding access to the world's reserve currency and when funding tightens again global citizens can expect a computer driven unwinding of assets in favor of cash as margins are raised and the recent "borrowed money" driven market sells itself off.

 

Via Reuters


Top central banks around the world on Thursday renewed a series of currency swap lines set during the 2007-2009 financial crisis, providing a precaution against future market strains.

The U.S. Federal Reserve said it had extended for another year the dollar swaps with the European Central Bank, Bank of Canada, Bank of England and Swiss National Bank. The announcement was released at the same time by the other central banks.

These provisions were an important part of the powerful response launched by monetary authorities during the crisis to keep global financial markets open, curbing lofty dollar funding costs which had spiraled due to fear
over counter-party risk.

Swap arrangements were revised and extended in November, 2011 as the euro zone debt crisis intensified, to ease the dollar funding pressure being experienced by some European banks.

Washington views the problems in Europe as a direct threat to the U.S. economy's own tepid recovery owing to deep trade links, and sanctioning the dollar swaps is one direct way U.S. authorities can help out their European counterparts.

Use of the swap lines peaked at $583 billion in December, 2008 but has since steadily declined, and stood at around $12 billion earlier this month.

The Fed said the central banks had also renewed until February 1, 2014, bilateral currency swap arrangements that would also provide liquidity "should market conditions so warrant."

The Bank of Japan separately said that it will decide on joining the extension of central bank liquidity swap arrangements at its next policy meeting, on December 19-20.

The Fed's dollar swaps have led some political foes of the U.S. central bank to claim that it was putting American taxpayer money at risk. The Fed robustly denied this accusation.

It only conducts swaps with other central banks. These central banks may lend to proceeds on to private banks in their own countries, but they take on the credit risk from those transactions themselves and it is not borne by the Fed.

In addition, because the transactions are indeed "swaps", the Fed receives foreign currency in exchange for providing dollars, giving it with collateral in the event of non-repayment. It also earns interest on the dollars it provides.

Furthermore, all foreign exchange risk is hedged out in each swap, so there is no risk of the Fed suffering a loss from any change in currency values during the duration of the deal.

 


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Fri, 12/14/2012 - 07:39 | Link to Comment DollarDive
DollarDive's picture

 

 

 

Swappapottamus

Swaporamus

Swapster

Swap a ling a ding dong.

Fri, 12/14/2012 - 07:26 | Link to Comment eddiebe
eddiebe's picture

Keeping the fiat game going and at the same time keeping the $ in it's priviledged position is hard work.

Fri, 12/14/2012 - 07:20 | Link to Comment negative rates
negative rates's picture

How about you and me go behind the wall, and swap a couple lines?

Fri, 12/14/2012 - 04:12 | Link to Comment Ghordius
Ghordius's picture

"The Fed's dollar swaps have led some political foes of the U.S. central bank to claim that it was putting American taxpayer money at risk. The Fed robustly denied this accusation.


It only conducts swaps with other central banks. These central banks may lend to proceeds on to private banks in their own countries, but they take on the credit risk from those transactions themselves and it is not borne by the Fed.

In addition, because the transactions are indeed "swaps", the Fed receives foreign currency in exchange for providing dollars, giving it with collateral in the event of non-repayment. It also earns interest on the dollars it provides."

Just as a remininder: the FED did not need any foreign currency until not long ago. That's what being the global reserve currency is all about

Fri, 12/14/2012 - 09:04 | Link to Comment Acet
Acet's picture

I can think of three reason why the FED would do this:

- To support the USD as the world's reserve currency, which is something that a lack of cheap dollars would put at risk.

- To try to keep the value of the USD down, both to try and boost export competitiveness for the US economy and, possibly, as part of the way by which they're trying to reduce the US government debt via devaluation.

- To export the USD inflation which is the result of QE: the more conduits to get the USD out of the US, the easier it is to get the newly minted dollars outside the US economy and thus the less the amount of inflation that remains in the US

 

There are risks to this strategy:

- With regards to the EUR there is a high-likellyhood that the Eurozone will break, maybe not a complete breakdown, but just the departure of some countries. In the scenario where the stronger nations leave (for example Germany), the EUR will go down in price. If the weaker nations leave, the outcome might be either slightly good - if only small nations leave, the EUR will go up a tiny bit - or very bad - if the big weak nations like Italy and Spain leave, the EUR is likelly to break up entirelly. My personal experience from Portugal is that the idea of leaving the EUR, which was previosuly unthinkable, is started to be seriously discussed. The Spanish are also getting agitated.

- With regards to the JPY, Japan is heading fast into a savings collapse induced by ageing. All those internal savings that have allowed the Japanese Government to have very low interest rates on their debt and muddle through for the 20 years are starting to wind down as more and more Japanese retire and start using up their savings. The outcome is increased interest rates on Japanese Treasuries, in all likellyhood leading to Economic Collapse.

 

Fri, 12/14/2012 - 05:52 | Link to Comment falak pema
falak pema's picture

all part of the great CB experiment. There is method in this fiat madness. They have no choice as they are now firmly on this roller coaster for the decades ahead. De facto CB world government to protect Oligarchy modelled "peace in our times".

We are seeing the virtual demise of nation states...Europe's model must now centralise, as the Greek template is showing us, the whole 27 nation ball game is "all in". 

For the reasons as posted here : 3062073

Fri, 12/14/2012 - 07:50 | Link to Comment Ghordius
Ghordius's picture

I don't see a 27 nation ball game "all in" in the cards. A 17 nation one, perhaps, but still on a confederate model

And a BriXit perhaps, with a few fishery rights thrown in for good measure and a "special status" for the UK

The knot is still about the City's banks access to the continental markets

at the cost of repeating myself once too many times: the fact that the FED has now a couple of hundred billions bonds denominated in other currencies is significant

I know, I know, the usual view is that it's all Spanish and Greek bonds, but I don't think so

I suspect it's the beginning of a portfolio of EUR denominated sovereing debt from all 17, including Germany, Finland and the Netherlands. If there were EuroBonds, than it would be much easier for both FED and BoE (another reason why the City wanted them)

It's the beginning of the "stashing of FX" on that side of the pond, for what is usually the most important of reasons, for a CB: "mopping up excess liquidity of it's own currency outside it's country", which is the way you try to prevent an hyperinflationary run, which nearly everytime begins abroad

I'm writing now since a year that at one point in the future we'll constantly talk about FX reserves and how they will be spent - in the reverse phase of this two-leg race

falak, I repeat, we are going confederate, not federate. proof: no EuroBonds around. further proof: no serious banking or fiscal union talks

Fri, 12/14/2012 - 12:24 | Link to Comment falak pema
falak pema's picture

ok, ok, I'll buy that, but the suprastructure wil impose fiscal cohesion amongst federates, as well as common foreign policies and concerted Oligarchy plays like Airbus and other cross country JVs. 

Call it what you like but the trend is to more central continental governance, based on mutual trust and blood letting on budget and industrial behemoth issues at Brussels and maybe one day...one can hope in a meaningful way....at Strasbourg. 

NB : the ONLY true recalcitrant in the 27 brigade is the UK; but whats new that's been there since 1700s and aftermath of war of spanish succession. 

Fri, 12/14/2012 - 05:44 | Link to Comment Water Is Wet
Water Is Wet's picture

"they take on the credit risk from those transactions themselves and it is not borne by the Fed... the Fed receives foreign currency in exchange for providing dollars"

Fail.

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