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.