Functionally, the Fed seems to have agreed to lend USD to the ECB in unlimited quantities unsecured and non-recourse.
This defies comprehension.
It’s potentially functionally a fiscal transfer.
Interesting they have the authority to do that.
They wouldn’t even do it for the US banks where the Fed demands collateral for loans.
It opens the door to widespread fraud and corruption as the ECB can now lend USD without supervision or regulation and in any quantity.
Somehow this got under Congress’ radar screen.
Watch for the size of the first USD auction.
The ECB and other CBs are going to set a rate and fill all requests at that rate.
Could be over $1 trillion?
Should bring USD LIBOR down to near the Fed Funds rate.
Helps the euro vs the USD at first.
However, the primary way they pay the Fed back is for someone down the line to sell euros and buy USD.
USD debt is external debt for foreign CB’s, so they are in much the same position the emerging market nations used to be in when they were choked with USD debt.
Still trying to comprehend all the ramifications, but they are very large.
This also means no government should default in the eurozone due to bank funding issues.
As long as the Fed lends unsecured and in unlimited quantities to the ECB and they do the same with their banks, the banks will be able to continue operating regardless of how technically insolvent they may be. It’s only when the funding is cut off or regulators step in that the problems surface.
It’s like the Fed is at risk of backing an international ponzi scheme again, watch for the size of the auctions.
They could snowball into the trillions, and be very difficult to shut down.
Which would also mean accelerating inflation.
by John Fraher and Simon Kennedy
Oct. 13 (Bloomberg) The Federal Reserve led an unprecedented push by central banks to flood the financial system with dollars, backing up government efforts to restore confidence and helping to drive down money-market rates.
The ECB, the Bank of England and the Swiss central bank will auction unlimited dollar funds with maturities of seven days, 28 days and 84 days at a fixed interest rate, the Washington-based Fed said today. All of the previous dollar swap arrangements between the Fed and other central banks were capped.