Yes, with their unlimited Fed swap lines euro credit is ‘improved’ but seems only for as long as the Fed keeps that window open?
Two problems with what the Fed is doing:
1. External currency (dollar) debt is moved from ‘private banks’ to the ECB if those banks fail.
If they hadn’t done this, bank failures would mean the banks default to their lenders who become general creditors and maybe equity holders when the smoke clears. The ECB can’t ‘fail’ without the entire europayments system shutting down. Before that happened it would probably sell euros for dollars to service it’s dollar debt if the Fed caps its lending to the ecb.
Yes, if the Fed never caps its lending to the ECB this can go on forever, with the ECB borrowing more and more to pay the dollar debt service, which is ponzi and will end one way or another.
2. It’s likely the Fed will be faced with rapidly increasing demands from the CB’s for the ‘unlimited’ dollar borrowings as the CB’s have banking systems that will utilize infinite USD loans if available to stay afloat and use new borrowings to service the old dollar debt unless/until they are declared insolvent, in which case the CB’s have the debt to the Fed.
3. This means the unlimited dollar lending will continue to grow until the Fed says no mas. Just like the classic emerging market dollar debt where it always tried to go parabolic before being cut off.
> On Sat, Oct 18, 2008 at 12:06 PM, wrote:
> Of course, they can now do everything, now that the Fed is
> effectively backing them via these unlimited swap