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(email exchange)

Thanks- good heads up by Matt Franko!

With this clarification the ECB seems to recognize the systemic support these swap lines provide, and will have to find other means of keeping a lid on the euro if that’s what they want to do.

>   On Tue, Dec 23, 2008 at 9:21 AM, Cesar wrote:
>   I agree with Franko comments.
>   See press release from Dec 19th below.
>   The Governing Council of the ECB has decided, in agreement
>   with other central banks including the Federal Reserve, to
>   continue conducting US dollar liquidity-providing operations at
>   terms of 7, 28 and 84 days. These operations will continue to
>   take the form of repurchase operations against ECB-eligible
>   collateral and to be carried out as fixed rate tenders with full
>   allotment. Given the limited demand, the operations in the
>   form of EUR/USD foreign exchange swaps will be discontinued
>   at the end of January but could be started again in the
>   future, if needed in view of prevailing market circumstances.

>   n Mon, Dec 22, 2008 at 8:05 PM, Warren wrote:
>   Cesar, please check this out, thanks!
>   W

Matt says:

Mr Mosler,

I think the swap lines between the ECB and the US Fed may not be the same swap operations that last week the ECB talked about terminating at the end of Jan 09.

The ECB currently offers term US$ liquidity (US$ that has been provided from the Fed via a previous swap between central banks) 2 ways. 1 way is via a collateralized operation, and 2 is a swap of euros for dollars.

On 15 October the ECB announced the swap facility:

“Provision of US dollar liquidity through foreign exchange swaps: As from 21 October 2008, and at least until the end of January 2009, in parallel with the existing tenders in which the Eurosystem offers US dollar liquidity against ECB-eligible collateral, the Eurosystem will also offer US dollar liquidity through EUR/USD foreign exchange swaps. The EUR/USD foreign exchange swap tenders will be carried out at a fixed price (i.e. swap point) with full allotment. Further details on the tender procedures for EUR/USD foreign exchange swaps will be released shortly.”

These “swap” type of transactions look like they never caught on (real Euros would have to be provided after all!), as most of the USD provided by the ECB ($100s of billions) have gone the “collateralized” auction route. For instance last week they did a 28-day where the collateralized operation had 47 bidders for $47.5 billion and the swap had one bidder for $70 million. So I think the ECB is just eliminating this liquidity swap vehicle because of “lack of interest”, but plans on providing US$ liquidity via collateralized auctions until at least the April 30 current expiration of the overall ECB to US Fed swap lines.

I could be mis-reading this but I offer my observations.


4 Responses

  1. Even worse. Ending swap lines but funding through a direct dollar funding facility provided by the Fed does not remove upward pressure on the euro. And the Fed doesn’t even get to profit on its forex position. Who’s coming up with this stuff??

  2. Glad to contribute here…

    Ive also been trying to understand the effect to US bank reserves of these swaps.

    Mike Norman has posted the graphs of bank reserves released by the Fed and there was a near instantaneous increase of $600B in bank reserves just about the same time as the near instantaneous establishment of the $600B temp. swap lines.

    Im trying break down the accounting and I think they could be the same transaction. Ive found some info that says forex swap lines can increase bank reserves in the US.


  3. Yes,

    Probably something like this:


    a. The CB makes $ loans to its member banks and credits their $ at that CB. The member bank then pays off it’s previous lender who has a $ account (ultimately) at a US bank.

    That leave the CB short $ which it covers by a loan from the Fed. Those funds loaned to the CB by the Fed are (ultimately) credited to the account of the ‘previous lender’ at the Fed (or whoever he made subsequent payment to).

    Hence balances at the Fed increase.


    b. The CB borrows the $ from the Fed in the first instance and gets those $ credited to it’s account at the Fed. Subsequent payment to member banks shifts those Fed balances to other accounts at the Fed.

    In the past those balances at the Fed would have been ‘offset’ by the Fed (or tsy) offering tsy secs. But with interest bearing reserves that’s no longer necessary. And with a zero rate target it’s moot.

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