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A full review on New Federal Reserve liquidity swap facilities?

By Amarendra Bhushan for CEOWORLD Magazine Updated:October 30, 2008

Today, the Federal Reserve, the Banco Central do Brasil, the Banco de Mexico, the Bank of Korea, and the Monetary Authority of Singapore are announcing the establishment of temporary reciprocal currency arrangements (swap lines). These facilities, like those already established with other central banks, are designed to help improve liquidity conditions in global financial markets and to mitigate the spread of difficulties in obtaining U.S. dollar funding in fundamentally sound and well managed economies.The Federal Reserve agreed to provide $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore, expanding its effort to unfreeze money markets to emerging nations for the first time.

The Fed set up “liquidity swap facilities with the central banks of these four large systemically important economies” effective until April 30, the central bank said yesterday in a statement. The arrangements aim “to mitigate the spread of difficulties in obtaining U.S. dollar funding.”

South Korea’s benchmark stock index rose by a record, the won surged and the cost of protecting Asia-Pacific bonds from default tumbled on optimism the measures will prevent the global credit crisis from upending financial markets. The Fed and China cut interest rates yesterday, followed by Hong Kong and Taiwan today.

“The swap lines will help unclog the liquidity pipeline and that action is boosting markets even more than” the Fed’s rate cut, said Venkatraman Anantha-Nageswaran, head of research at Bank Julius Baer & Co. in Singapore. “It’s a step in the right direction and prevents things from getting worse.”

South Korea’s Kospi Index surged 12 percent to 1084.72, and the won jumped 14 percent to 1,250 per dollar. Singapore’s Straits Times Index climbed 9.7 percent.

The cost of protecting Asia-Pacific bonds from default tumbled, with the Markit iTraxx Asia credit-default swap index of 50 borrowers falling the most since its was created in September 2007. The United States Federal Reserve(Fed) on Wednesday opened a credit line of 30 billion U.S. dollars for Brazil through a swaps operation of dollars for reais.

The Central Bank of Brazil said the deal did not indicate the economic condition of the country. Rather, it would increase the availability of dollars and improve liquidity conditions. The biggest impact of the international financial crisis on the Brazilian economy has been the shortage of dollars for the export sector. The agreement with the Fed will ease the situation and reduce pressure on the price of the dollar.

The agreement will help combat the impact of the global credit crisis on the Brazilian economy and “shows the importance of the close cooperation” between the monetary authorities in the current world situation. The bank said it will take operational measures to implement the initiative, under the limits and conditions set by the National Monetary Council.

The dollar reserve, available for Brazil till April 30, 2009, will be used when the government considers it necessary. The Fed has also opened similar swap credit lines for Mexico, South Korea and Singapore, with the same amount and terms. Singapore’s central bank announced on Thursday a swap facility with the U.S. Federal Reserve that will provide dollar liquidity of up to $30 billion to meet the needs of the banking system.

The Federal Reserve and the MAS are establishing a swap facility that will provide U.S. dollar liquidity of up to $30 billion,’ the Monetary Authority of Singapore (MAS) said in a statement. ‘Given the international character of financial markets in Singapore, MAS deems it prudent to join the group of central banks that have established swap facilities with the Federal Reserve,’ it said.

Federal Reserve Actions
In response to the heightened stress associated with the global financial turmoil, which has broadened to emerging market economies, the Federal Reserve has authorized the establishment of temporary liquidity swap facilities with the central banks of these four large and systemically important economies. These new facilities will support the provision of U.S. dollar liquidity in amounts of up to $30 billion each by the Banco Central do Brasil, the Banco de Mexico, the Bank of Korea, and the Monetary Authority of Singapore.

These reciprocal currency arrangements have been authorized through April 30, 2009.

The FOMC previously authorized temporary reciprocal currency arrangements with ten other central banks: the Reserve Bank of Australia, the Bank of Canada, Danmarks Nationalbank, the Bank of England, the European Central Bank, the Bank of Japan, the Reserve Bank of New Zealand, the Norges Bank, the Sveriges Riksbank, and the Swiss National Bank.

IMF Announcement
Separately, the Federal Reserve welcomes the announcement today by the International Monetary Fund of the establishment of the Short-Term Liquidity Facility, which is designed to help member countries that are facing temporary liquidity problems in the global capital markets. The Federal Reserve is supportive of the IMF’s role in helping countries address and resolve their ongoing economic and financial difficulties.

Banco Central do Brasil Actions

The Federal Reserve and the Banco Central do Brasil (BCB) have agreed on a swap facility amounting to $30 billion which will expire on 30 April 2009. This facility will be used to bolster the BCB’s ability to provide adequate U.S. dollar liquidity to bank funding markets. This agreement is another initiative within the BCB’s strategy to limit the impacts of international financial turmoil on the Brazilian economy and highlights the critical importance of central bank cooperation at the current juncture.

Today, the U.S. Federal Reserve, the Banco Central do Brasil, the Banco de México, the Bank of Korea, and the Monetary Authority of Singapore are announcing the establishment of temporary reciprocal currency arrangements (swap lines). These facilities, like those already established by the Federal Reserve with other central banks, are designed to help improve liquidity conditions in global financial markets and to mitigate the spread of difficulties in obtaining U.S. dollar funding in fundamentally sound and well managed economies.

Actions by Banco de México

The swap mechanism established between Banco de México and the U.S. Federal Reserve is for up to US$30 billion. These funds can be used to provide dollar liquidity to financial institutions in Mexico. The mechanism will be in place until April 30, 2009. This facility gives Banco de México greater flexibility to meet the possible needs of the financial markets when deemed necessary, although at this time its utilization will not be necessary. Banco de México will continue to monitor the evolution of the financial markets, maintaining its continued commitment to providing the liquidity needed to preserve a welloperating financial system in Mexico.

The Bank of Korea Action

The Bank of Korea will have access to U.S. dollar funds of up to USD 30 billion in exchange for Korean won through the reciprocal currency arrangement with the Federal Reserve. This swap facility expires on April 30, 2009. The Bank of Korea will provide U.S. dollar liquidity in Korea through competitive auction facilities to banks, established in Korea, using funds from the swap line. The Bank of Korea will continue to strive for financial market stability through cooperation with other central banks.

Monetary Authority of Singapore and Federal Reserve Swap Facility

The Federal Reserve and the MAS are establishing a swap facility that will provide U.S. dollar liquidity of up to US$30 billion. Given the international character of financial markets in Singapore, MAS deems it prudent to join the group of central banks1 that have established swap facilities with the Federal Reserve. This is a precautionary measure to reassure financial institutions in Singapore, most of which have global operations, that they have access to U.S. dollar liquidity. MAS judges that it is not necessary to draw on the swap facility at this time, but will continually assess the need as global conditions develop. The swap facility with the Federal Reserve has been authorised through 30 April 2009.

The U.S. dollar swap facility will enhance the robustness of the Asian Dollar Market for U.S. dollar funding and the foreign exchange markets in Singapore. These markets are a significant part of the global financial system, and international financial institutions rely on Singapore as the largest U.S. dollar and foreign exchange centre in Asia outside of Japan.

Singapore Dollar Markets

The facility complements MAS’ management of Singapore dollar markets. There is sufficient liquidity in the Singapore dollar market to meet the needs of the banking system here. Through our market operations, MAS will continue to inject additional liquidity as necessary to ensure this. In addition, the MAS Standing Facility is available each day for all eligible MAS Electronic Payment System (MEPS+) participating banks to deposit or borrow Singapore dollar funds against Singapore Government Securities collateral.

MAS stands ready to take measures necessary to strengthen the orderly functioning of financial markets and the stability of the financial system in Singapore, and to maintain confidence in Singapore as an international financial centre.

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