The Federal Reserve extends currency swaps with world banks
The Federal Reserve will extend its program to make dollars available to central banks around the world through next summer, reflecting continued strains in European financial markets that could endanger the world economy in 2011.
The announcement by the Fed on Tuesday came amid signs that the fiscal crisis that has roiled Europe for much of the year continues apace, despite a series of efforts by the European Union, International Monetary Fund and European Central Bank to staunch it.
The Fed initially created swap lines with the European Central Bank, Bank of England, and other counterparts in advanced nations around the world during the thick of the 2007-09 financial crisis, then resurrected the program in May 2010 when financial strains appeared in Europe. The lines were scheduled to expire Jan. 31, but now will be extended through at least Aug. 1.
Essentially, the Fed swaps dollars for euros, pounds or other currencies with a foreign central bank, which in turn can lend dollars to banks in its nation that are experiencing a shortage of dollars. The eligible foreign central banks, which also include those in Canada, Switzerland and Japan, protect the Fed against any losses. The program has been little-used this year, with only $60 million in outstanding lending last week (by contrast, a year earlier, the figure had been $14.4 billion).
Though the swap lines are little used now, the decision to keep them in place carries some symbolic weight, showing that the Fed stands behind efforts to address the European crisis, which Fed officials fear could affect the U.S. economy if it spirals out of control.
"These swap lines are essentially the Fed's only available policy response to stresses involving the European sovereign debt crisis," said Michael Feroli, an economist at J.P. Morgan Chase.
European markets continue to grapple with a series of problems – from high government debt to a still-troubled banking system – with no clear resolution. Emergency bailouts have been required in Ireland and Greece this year, and there is concern that markets may abandon Portugal or Spain next.
On Tuesday, Moody’s rating service warned that it may downgrade Portugal’s bond rating next year, as the country struggles to keep its economy on track while making deep cuts in government spending. Spain, meanwhile, was forced to pay a higher price in its latest sale of short-term bonds. Some analysts fear that the large amount of money that Spanish governments and banks must raise early next year may undermine the country’s creditworthiness.
Also Tuesday, ratings service Fitch said it is conducting an assessment of Greece’s creditworthiness over the next six weeks that could result in the nation’s debt being cut to junk bond status, if it is downgraded below its current BBB- rating.
As part of the continent's crisis response, the European Central Bank has been buying tens of billions of dollars in government bonds, and also has become a mainstay source of funds for banks that have trouble raising money on their own.
Although the ECB has made clear its intent to make sure the region's banks have as much funding as they need, it can only provide the money in euros. The Fed’s willingness to keep the swap window open ensures another important tool will be available to avoid a broader crisis.
Source: Washington Post
Date: 22.12.2010 [ID: 275]