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The total of $279 billion is very high.

Note the seven day was higher than the one day, which could mean the longer term offerings will attract even more borrowers.

This is a lot of lending for the Fed to be doing to the ECB.

It also moves the USD debt in the Eurozone from the private sector to the public sector.

The private sector can default, declare insolvency, get ‘reorganized’, where the USD debt can be ‘converted’ to equity and functionally vanish, all to be written off by the creditors.

Public sector external debt doesn’t have that option, and thereby introduces systemic risk.

If the Eurobanks can’t/don’t repay the ECB, the Fed is left with the option of selling euros for USD for repayment.

And only if the ECB survives as a political entity.

It is not guaranteed by the national governments.

The ECB today offered banks unlimited dollar funds for seven days in the first tender of its kind, lending $170.9 billion. It also loaned an additional $100 billion for one day.


13 Responses

  1. Do you see anyone else who realizes the implications of this? In the financial press today all the talk about is about bank recapitalization – these moves, which are much bigger are relegated to the back pages.

  2. Not so fast warren, yves smith over at naked captialism and karl denniger at tickerforum have been all over this too. Some people actually look beyond their view of central park.

  3. Warren, I’m reading some of the comments there, but I still am hazy on the mechanics. Is the “swap” essentially a temporary exchange of euros for dollars? If that’s the case, why would it have the ill effects you are saying it will have? My brain is starting to hurt trying to figure it out…

  4. mine too!

    yes, functionally we lend the ecb dollars and ‘get’ euros as collateral (a euro deposit at the ecb). this is very close to an unsecured loan to the ecb, because if for some reason they can’t or won’t pay back the $ all we could do is sell euros and get $, and with a $1 trillion loan already, and climbing, that would be problematic.

    meanwhile, we have agreed to do this in ‘unlimited’ size. the ecb in turn is offering ‘unlimited’ $ loans at a fixed price of about 2.25% last I saw. in return the ecb agrees to take a bunch of (suspect) collateral from its banks to ‘secure’ the $ loans.

    one problem will be if the 1 trillion keeps moving higher it shutting it off without systemic risk is problematic. this is what happened in latin america and other emerging markets in years past.

    another potential problem is the ecb isn’t guaranteed by the national govts meaning if they shut it down the eurozone gets to keep the 1 trillion + dollars and the Fed gets nothing. this would more than ‘finance’ a return to their national currencies if that’s what they want to do.

    also, this sort of ‘moves’ ultimate responsibility of the $ private sector debt in the eurozone to the ECB- if the euro banks default the ecb is on the hook to the fed. That would be a total mess. The ecb doesn’t have any $ and would have to sell euros to get them.

  5. OK, let me see if I follow the logic: The Fed and ECB are essentially doing a currency trade – a dollar deposit at the Fed for the ECB, a Euro deposit at the ECB for the fed (at current exchange rates, I assume). The Fed leaves it’s deposit alone. The ECB uses it’s deposit to loan dollars to other banks. These dollars, as banks lend, or use them to pay off loans, then will move around to other accounts at the Fed (since reserves are all just numbers at the Fed). Since the Fed retains it’s Euro deposit, it can unwind its side at any time by exchanging its Euros for dollars (or any other currency) by selling them to the ECB or any other party. The ECB, though, will need to obtain the dollars to unwind its side (which it no longer has) from other parties. If there is a flight from the Euro, it could be very hard for the ECB to do without tanking it further. And if the member governments decide in the meantime to dissolve the ECB (or if a mojority of the memeber countries decide to withdraw), those dollars remain in the system, while the Fed’s Euros disappear.


  6. reservedplace.blogspot.com

    Since the reciprocal swap arrangements have been expanded three times already this month, on the 18th, 24th, and 26th, and because the central banks involved have increased their dollar lending, other things equal, it would not be surprising to see an increase in Fed custody holdings at the moment. But this would not necessarily mean that central banks are accumulating dollar reserves, and may conceivably be concealing a reduction in dollar reserves holdings.

    Addendum: how the swaps work:

    The question of how the swaps work has arisen in the comments on this post.

    Initially, I had imagined, for each increase in the reciprocal swap programme, a single foreign exchange swap between the Fed and each central bank involved, which effectively loaned the stated amount of dollars to the foreign central bank until April 30th 2009 (the programme’s planned horizon at present) against collateral of their own currency, to be lent by them as the need for dollars arose from their commercial banks. I therefore thought that the swaps must be off-balance sheet, because there was no item on the Fed’s H.4.1 report sufficiently large (ie $290bn from September 26th) to account for either side of the swap. After further consideration and discussion elsewhere, I now think that the announced size of the swap programme (which has since increased to $620bn) actually represents the maximum size of a portfolio of swaps. My guess is that, for each dollar loan auction by a foreign central bank, the dollars are drawn from the Fed via a matching currency swap of the same size and term as the loan. These dollar loans from the Fed are probably included in the “Other Federal Reserve Assets” line of H.4.1, but since they have yet to build up to their limit, that item remains much smaller than the reported size of the reciprocal swap programme.

    I had been wondering about the pricing of the swaps, which would be a huge issue if the swap is for seven months and the dollar lending is for shorter periods, but I would expect that the terms of the swap are arranged so that their pricing reflects the dollar interest rate achieved in each auction. Nevertheless, it must be said that this kind of detail should be given in the notices (including from the foreign central banks involved) that announce these operations. Now that the swap programme is so large, the potential interest differentials (depending on how the swaps are arranged) are in the order of billions of dollars over the planned life of the programme.
    Posted by RebelEconomist at 08:09 6 comments

  7. Jim, if 48 of the States decided to succeed from the USA and form a currency called the continental and the only states left funding the old federal government were ohio and iowa – how would you value the US dollar versus the continental? Why is it not a good idea to give your money to people you can’t tax?

  8. 8. pretty good!!!

    9. good update

    the longer term offerings start next week. this week it’s just the 7 day and overnights, best i can tell

  9. “another potential problem is the ecb isn’t guaranteed by the national govts meaning if they shut it down the eurozone gets to keep the 1 trillion + dollars and the Fed gets nothing. this would more than ‘finance’ a return to their national currencies if that’s what they want to do.”

    If the ecb is not guaranteed by the national governments why would anyone accept payment in Euros?

  10. “If the ecb is not guaranteed by the national governments why would anyone accept payment in Euros?”

    I saw an episode of andy griffith where this old timer had a bond on the city that was payable in confederate dollars – they didn’t have the confederate dollars to pay him – but said it didn’t matter because they were worthless and they didn’t have to repay the old timer – I would have demanded my payment – just because the confederate dollars were worthless shouldn’t have absolved them from having to repay their debt.

    A farmer in mexico would not give me his daughter’s hand in marraige for even 100K in US dollars backed by the full faith and credit of the US government – but he would for 10 donkeys – what did that silly farmer not realize with 100K us dollars he could have purchased way more than 10 donkeys?

    The Indians sold the island of manhatten to the euro boyz for 60 guilders back in the 1600’s – they didn’t realize human beings could own land that was a free gift by the spirits to be enjoyed by all.

    It’s like Warren told you and I agreed – at the end of the day all civilization – and the money attributable to that civilization – is backed up by an evil thug with a gun who will blow your brains out if you don’t do what he wants. The indians who sold manhattan got blowed away when they didn’t move off the land they sold. Had the confederacy won the war, would thier dollars have become worthless? When you think these things through to their logical end, you realize how silly most of humanity is. Mostly a bunch of useless clone cumsquirts trying to inflate their importance in the universe.

    A EURO backed by a bunch of people who don’t have the balls or the means to blow my brains out don’t really scare me so I have less incentive to take their rules and money than the people who wake up hoping I will misstep so they can blow my brains out – like that movie “the good shepherd” – capiche?

    Warren isn’t worried about those russian sub pirates docking in the USVI and raping sada and burning his house to the ground because as Denis Leary said – the USA got the bomb, and we got the balls to use it too, even if it means blowing up the whole planet – we already dropped 2 bombs, so there. When is the last time you saw any of those euro boyz drop a bomb on their fellow human being like we did? That is all you really got to worry about. But now my friends in Alaska are talking about succeeding from the nation, and I don’t get it, Sada can be drafted into the US military to kill people in defense of Alaskan eskimoes – why would they give that up?

    Anyways RSG – more directly to your point about why take silly euros – my buddy bhagwati at the CFR and his buddies make the financial reality that you react too, and they want to do something that alexander the great, the first emporer of china, atilla the hun, hannibal, napolean and ceaser could not do – unite those euro boyz in lasting peace with one supreme government and currency – LOL! In a long term several hundred year strategy to get the whole world on the same playing field with the same rules and financial regulations – God what a comedy it all has become!

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