[Skip to the end]

Outstanding advances under Fed ‘unlimited’ swap lines to the 4 foreign CB’s plus several lines with limits no totals $615 billion and accelerating!


21 Responses

  1. We won’t stop. Bernanke was very clear on this today. This will remain ongoing without limit. Furthermore, foreigners will always be able to pay because we are giving them the money to make the payments! Crazy, but true.

    Fed can “sell” dollars without limit. These swaps will eventually turn the dollar’s trend down once again. It didn’t have to be this way. Stupid, stupid, policy.

    The same guys that brought you the demise of Lehman and the soon-to-be-demise of GM, Ford and Chyrsler, are loathe to let a foreign institution fail. Our guys can go screw themselves, but God forbid we cause some Euro bank to have to sell some assets. Even if it means completely destroying our currency. Nuts!!!

  2. For Mike,

    I copied this from the ECB site:

    11 November 2008 – Consolidated financial statement of the Eurosystem as at 7 November 2008
    Items not related to monetary policy operations…

    ….The net position of the Eurosystem in foreign currency (asset items 2 and 3 minus liability items 7, 8 and 9) increased by EUR 22.8 billion to EUR 361.1 billion on account of customer and portfolio transactions and US dollar liquidity-providing operations. On Thursday, 6 November 2008, a US dollar liquidity-providing reverse transaction of USD 10 billion matured, and a new transaction of USD 70.8 billion, with a maturity of 84 days, was settled. On the same day, a further US dollar liquidity-providing reverse transaction of USD 92.1 billion matured, and a new transaction of USD 58.6 billion, with a maturity of seven days, was settled. Also on Thursday, 6 November 2008, a EUR/USD foreign exchange swap operation of USD 14.5 billion matured and a new operation of USD 1 billion, with a maturity of seven days, was settled and, on the same day, a further EUR/USD foreign exchange swap operation of USD 0.7 billion, with a maturity of 84 days, was settled. These two foreign exchange swap operations had no effect on the net position of the Eurosystem in foreign currency. All US dollar-denominated transactions were conducted by the Eurosystem in connection with the temporary reciprocal currency arrangement (swap line) between the European Central Bank (ECB) and the Federal Reserve System….”

    To me it looks like they shifted some US$ funding to the 84-day term from shorter term auctions that they had been tapping…there will continue to be weekly 7-day auctions and next week they are scheduled to roll over 28-day funds. I think if the shorter term auction allotments start to build up again, now that they put the $70B on the 84-day term, this could signal additional/continued dollar shortages over there….


  3. yes, the ecb’s funding seems to have been flat, but the other cb’s picked up the slack as the total outstanding went up. seems to me banks and other dollar borrowers will go to the cb with the best terms.

    while i agree with mike that the fed intends to keep these lines open, i think there is a number that causes them to stop, particularly if the numbers keep accelerating. if the world turns out to be more ‘honest’ than i suspect it is the lending could level off and increase only a few percent per year, in which case the fed would let it continue.

    meanwhile, it is allowing what could be insolvent euro banks with noting to lose access to funding to fund, for example, the eurozone auto industry.

    so the fed has the door wide open for unlimited funding to the eurozone auto industry while the door is shut to our domestic industry?

    not that i favor either, as my first choice is to have the tsy pay our fica (payroll taxes) to give us the incomes needed to buy cars and make mtg payments, which is what is needed most by the industrial and financial sectors.

  4. From reviewing their web-sites, Ive noticed that both the BOE and ECB have collateral requirements for their US$ auctions. They currently demand AAA grade collateral (plus small margin for FOREX risk if collateral denonimated in non-US$) while accepting just about any type of security (Gov/GSE/RMBS/CMBS etc..).

    This may be a US Fed requirement. So maybe US Fed doesnt see a big risk in expanding swaps as long as there is investment grade collateral?

    Theoretically a “limit” to the auctions of US$ swapped may then be the amount of these types of investment grade collateral the troubled foreign institutions own?

    Key would be if collateral provided degrades below AAA, I was thinking that we could see an actual decrease in the allotments at these auctions if previous participants cannot come up with same AAA collateral as used in previous auction(s), due to downgrades. Maybe then followed by liquidations/failures if the US$ were absolutely needed.


  5. glad to see the fed and others relying on the ratings agencies after all the criticism of same with the private sector did same!

    you sure the ecb isn’t dipping below AAA? They do take national govt paper which is lower than that, and they take all kinds of bank paper which to the best of my knowledge is not rated AAA??? ‘investment grade’ falls a lot lower than AAA, for example.

  6. For Mr Mosler

    WRT your comment in #4 above,

    Is a scenario you envison something like the following:
    Take a European Bank that was “technically” insolvent, but for whatever reason (political?) the European regulators wont shut them down (like you say nothing to lose), they show up at these USD$ auctions, post qualifying collateral (that they may actually have as not ALL of the banks assets will be junk), and gain access to additional large amounts of low cost US$?


  7. yes, and worse.

    Banks can buy each other’s paper and bring it to the ECB, etc.

    When you get some fairly smart euro guys staring down unlimited $ loans from the Fed/ECB no telling what schemes they may come up with.

    For example, maybe they could buy new Fiat A rated bonds and take them to the ecb for funding, and get their auto industry recapitalized at our expense.

  8. So what do you think is the underlying motive behind this? Seems very strange to slam the door on our own domestic producers and at the same time provide virtually unlimited access to operations in foreign states.

    I was reading the news today and noted that GOP leaders here have decided they aren’t about to back any funding for the domestic producers. In fact, GM was referred to as a “dinosaur” who’s “day of reckoning” had finally come. So, I see that we can funnel dollars into the eurozone at breakneck speed, and we can funnel them into the US financial sector… but if you produce tangible goods and employ lots of American citizens, you can go screw yourselves, eh?

    Seems a lot like the players in washington got elected by some folks over in Europe rather than here in the US, because it certainly doesn’t seem, on the surface at least, that there is much happening here defending the interests of the American people.

    Is there some policy / power struggle going on here at some level I am unaware of? Is this an effort to destroy the autonomy of the eurozone… or is it an effort to destroy our own?

  9. Hi Matt. Thanks, you may be right about the longer term of these swaps, however, I think it is a moot point. I disagree with Warren, as well, that at some number the Fed will stop. The Fed has been very clear that these are now permanent facilities. So the term doesn’t matter because they will be rolled over indefinitely. The Fed will turn the dollar’s trend down at some point. We may be nearing that.

  10. Warren, aren’t their statutory debt limits that would need congressional approval to increase that would come into play at some point?

  11. 11. seems to me purely a lack of understanding of exactly what they are doing at all levels- congress, executive, fed.

    12. for an extreme example, are you suggesting that at 100 trillion and upper double digit inflation they keep it going?

    13. they only apply to deficit spending by congress. fed spending doesn’t count. might be one reason some spending on financial assets was moved from tsy/tarp to fed.

  12. Possibly related:

    I was reading Ambrose Evans blog here


    He references a S&P report (Ill try to find link later) that identifies total upcoming US$ re-fundings in Europe. From looking at the charts, 4Q08: ~$200B, 1Q09: $250B, 2Q09: $250B. Based on the ECB US$ auction results of late it looks like they have acquired the full 4Q08 funds and a downpayment on 1Q09.

    He also states that this continues so that European banks have a total of $2.1 Trillion of debt that will need to be re-funded within the next 3 years.

    I guess this is what the Fed is helping with? Otherwise how do the Euro banks get this done?

    “…the figures stagger me!” – Moe Howard


  13. Mike, yes, you could be right!


    Yes, looks like the same dynamic. Without the fed they would have to fund in the ‘money markets’ and presumably only the ‘credit worthy’ would get funding. the rest would be insolvent and debt holders would take their lumps and become equity holders.

    Instead, the fed is supporting insolvent institutions around the world, and making massive loans to entities that could have little possibility of every paying them back.

    it’s a transfer of real wealth from us to them.

    it’s like the fed buying dollar denominated bonds from the world’s central banks, and we’ve seen how that has ended many times in the past.

  14. Looks like the swap line reduced a bit this week to $606B. (BOJ giving some back?:)

    Ive looked at the ECB us$ auctions as of today.

    Today (Nov. 20) they finished the latest 7-day operation for $72B. Thats up from $60B last week.

    ECB current totals:

    3 rolling 84-day auctions outstanding: $100B (70+20+10)
    28-day: $52B (Next one Dec.18)
    7-day: $72B (just went off today Nov 20)

    So they have increased (a bit) the short term funding even though they put $70B on the last 84-day auction.

    $212B as of Nov 18

    $224B as of Nov 20

    So the ECB should be well supplied for this quarter as S&P says all Europe had $200B of re-fundings this quarter, but again according to S&P, Europe has another $250B of re-fundings coming up next quarter.


  15. Yes, noticed that number on the fed statement. then i scrolled down and saw a statement with ‘other assets’ broken down by region.

    seems the swaps wouldn’t be broken down by region like that? is that a different ‘other assets?’

    am i missing something? will dig deeper tomorrow

  16. Mr Mosler,

    As an FYI, week before last I called the Fed about these swaps.

    Ended up with David Skidmore (Ph. 202.452.2782) I think he was in Public Affiairs Dept.

    He was very knowledgeable about these swaps and very open to my questions.

    He said that the swaps were conducted with the central banks first, and then it was up to the foreign central banks as to how they used the US$ in their systems, and said that at that point those foreign operations were independent of any US Fed actions. He said that the “TAF” auctions I see at the ECB website are similar to the US Feds TAF auctions but were strictly a ECB operation. The ECB is using the US model to allocate.

    He identified (without me leading him) the Line item you have talked about “Other Federal Reserve Assets” in the weekly H.4.1 as the place I should look to monitor the status. He acknowledged that (at that time) the amount was in excess of $500B.

    I confirmed that it was a temporary swap program, expiring 30 APR 09, and asked him if the Fed intended to extend it, he sort of chuckled and said that the board would decide that closer to the end date.

    As for this weeks slight reduction to 606B, perhaps if the Fed marks to market, the reduction could be because the dollar moved that way in FOREX?

    Thanks again for all you do here…


  17. well done and much appreciated!

    And good point- if the ‘other assets’ are the euros held as collateral they could have been marked down.

    Let me know what you turn up as you keep digging,

    and thanks!

Leave a Reply to mike norman Cancel reply

Your email address will not be published. Required fields are marked *