This week, beginning Thursday, August 25th, The federal Reserves's Bernanke will present a speech at Jackson Hole's Financial Meeting, which is held every year.August 25-27 ~ Jackson Hole ~ Fed may have bullets left, but are they blanks?
This year, imo, Bernanke could mention the "new global financial architecture"(***April 8-11- 2011 ~ The New Global Financial Architecture ~ New Bretton Woods ~ Soros Funds Conference for Global Monetary Architecture ) that has been waiting and is ready to go. IMO, he could mention the IMF and UN's suggestion to use SDR's as a means to stabilize the global economy. He may also mention something that has been kept under the radar for quite some time .. and .. that would be the currency swaps that have been ongoing since before 2008's economic crisis.
Check out the following few links for a brief history and then read the article posted today that is titled " FX, forex lines to the resue". This is purely speculation on my part, but since following the currency swaps and wondering when something would be announced, I feel confident that an announcement of this sort is a logical conclusion. I guess we wait to see what the grand plan will be after Thursday's Jackson Hole Meeting .. Kel ...
_History_
Snip ~ The program has so far gone unreported in the mainstream media and is a major expansion of Federal Reserve involvement in the global economy. It represents a stark break from the prior role of the Fed, moving it into territory more traditionally occupied by the International Monetary Fund (IMF). March 2009 ~ U.S. Injecting Billions Into Foreign Central Banks ('09) -
and more links ~ CURRENCY SWAPS 2008-2009-2010 LINKS ~
** Read Additional Links that accompany ~ September 2009 ~ UN wants New Global Currency to Replace Dollar
Snip ~ Gyohten Says Japan Should Support Dollar’s Key-Currency Status
Nov. 2009 ~ IMF SAYS THAT THE DOLLAR MAY STILL BE OVERVALUED
November 2009 ~ Bernanke issues rare greenback warning
Snip ~ a prominent economist told a conference of international monetary policy makers hosted by the San Francisco Federal Reserve on Tuesday. "I don't think the dollar is going anywhere, and I don't think the SDR (International Monetary Fund-issued special drawing rights) will become an important rival to the dollar until we have liquid private markets in SDR-denominated claims," said Barry Eichengreen, a professor of economics and political science at the University of California at Berkeley. link ~ US dollar likely to remain reserve currency-paper
***
Overinterpreting “Currency Swap Agreement”
CURRENCY SWAPS 2008-2009-2010 LINKS ~
Feb 24th 2011 ~ Must Read ~ IMF Says Weaker Dollar Would Help Global Growth ...
_today's article_
August 23, 2011
FX swap lines to the rescue?
Some believe that of all the emergency facilities initiated by global central banks in 2008 the most helpful was in fact the introduction of unlimited FX swap lines.
As the Bank of International Settlements wrote in May 2010:
Continues ...
From our assessment in section 11, we conclude that the swap lines provided by the Federal Reserve were very effective in relieving US dollar liquidity stresses and stresses in foreign exchange markets, so that the Fed’s objectives were substantially met. It seems plausible that had the Fed not acted as it did, global financial instability would have been much more serious, and that the recession would consequently have been deeper. This effectiveness of the Fed’s actions was most likely due to the fact that funds were provided quickly, limits were raised flexibly as the financial crisis intensified, especially after the failure of Lehman Brothers, and that large amounts were provided via the swap lines. The Federal Reserve consciously accepted some financial risk, but as noted in section 9, the risks were managed, and no losses were incurred for the swap lines which had expired by 1st February 201099. The attractiveness of the dollar as a trading and investment currency has probably been enhanced by the Fed’s actions.
No surprise then that many are on watch for a repeat maneuver from the Federal Reserve on account of the current troubles in the market. Former Wall Street FX trader Bruce Krasting, for one, has already expressed his belief that this would be a much more useful move than any additional form of QE:
While the US has some major league problems, those issues can’t be addressed by the Fed. There is nothing more that the Fed can do. With short-term rates at zero (and planted there for years to come) and the ten-year at 2% there is nothing left to be done. Or is there? I maintain the next move by the Fed is to massively open up the dollar swap lines with European central banks. I don’t think Bernanke wants to announce this significant step at Jackson Hole. It is an EU issue and the Fed can’t take the lead on this. Opening the swap lines will prove to be very unpopular in the US. Politicians will jump on it as a bailout of Europe while America is struggling.
But this time round there are some important points to consider.
First, as we all know, the Swiss National Bank was the first to move on the FX swap-transaction front on August 10 — a move that possibly suggests this all started with a Swiss franc-denominated funding shortage rather than a dollar one outright.
Second, the Fed’s dollar swap lines never expired (in fact they were just recently renewed in June until August 2012). Thus they’ve been available all this time. You can track the history of the facilities’ use via the Fed’s H.4.1 liquidity swap data. As Zerohedge points out, this shows the lines were actually most recently tapped by the SNB. Meanwhile, only one institution has so far decided to take up the dollars being made available via the ECB’s dollar funding facilities.
But it’s very wrong to construe the Fed’s SNB entry as a show of dollar weakness by the SNB. The Swiss central bank has more than $50bn in dollar reserves. In this case the SNB is only acting as a dollar repo intermediary to any of its regular repo counterparties — some of which are not even based in Switzerland. $200m is also a very small sum in the grand scheme of things.
Furthermore swap lines are different from swap transactions.
As we’ve stated the SNB has always provided dollar lines. In this facility the SNB lends dollars against eligible repo collateral (any of the dollar and non-dollar denominated securities listed here). In its liquidity-focused FX swap transactions, however, it acquires foreign exchange from commercial banks against Swiss francs for a limited period (so much more like a currency basis swap).
While the SNB has not revealed with whom it is conducting its recently announced FX swap transactions, we can presume the counterparties are commercial banks active in Europe, although not necessarily from the euro area. This suggests a Swiss-franc liquidity issue somewhere — by now probably resolved due to the literal flood of Swiss francs onto the market, a move which may have also influenced the closely-connected euro markets as well.
Indeed, it is unlikely that this report from the Budapest Business Journal is a coincidence:
The National Bank of Hungary (NBH) received and accepted €75 million bids for three-month floating rate EUR/HUF swaps as demand for the facility eased at the weekly tender on Monday. Interest in the fx swaps dropped after heavy demand in the previous two weeks, parallel with the steep strengthening of the Swiss franc, in which a large part of the Hungarian retail loan stock is denominated, against the forint. The NBH allocating €140 million of the three-month swaps on August 8 and €255million on August 15. The NBH offered the usual maximum of €400 million three-month swaps at a maximum 203.03 swap points on Monday. In the absence of expiring swaps, the outstanding volume will rise to €1.432 billion on the August 24 settlement day, Econews calculated. On Wednesday the stock will reach its highest level since early February.
Given the almost instantaeous effect, it’s clear that FX swap lines or transactions can make a big difference.
Interestingly, it’s a point that’s been well recognised by Már Guðmundsson, governor of the Central Bank of Iceland in a paper to the IMF in March 2011. Firstly, Guðmundsson observes there are great risks associated with any breakdown in the FX swap market. He also notes to what degree swap lines can help to overcome such issues:
But in any case, runs are less likely in normal times, and during the peak of the crisis, this process broke down almost completely in many cases, and FX swap spreads skyrocketed afterwards. It became extremely costly, and in some cases almost impossible, to convert domestic liquidity into dollar liquidity. The same scenario played out vis-à-vis the euro for several European countries outside the euro area.
In a situation like this, the home central bank’s ability to help banks refinance the foreign liquidity denied them on the market is limited by the size of its reserves or the willingness of its larger neighbours to help. The Icelandic case brought this into sharp relief. Just before their failure, the three cross-border banks had foreign currency balance sheets amounting to almost 7½ times GDP. In comparison, the reserves of the Central Bank, including swap lines with Nordic countries and committed credit lines, amounted to around 35% of GDP. Even if some of the foreign currency liabilities were long-term, the reserves were no match for the bleeding balance sheets of the banks.
The issue here is one of the ebb and flow of international liquidity, which is a monetary issue. Although the provision of foreign currency liquidity through reserves was clearly important during the crisis, most studies seem to support the conclusion that it was the dollar swap lines that made the key difference, especially when they were uncapped vis-à-vis some key central banks. It was to a significant degree the domestic LOLR process replicated at the international level.
But herein lies the problem. Swap lines are not a permanent solution, says Guðmundsson.
What’s more, he notes, it might not even be a dollar liquidity crisis that comes to stalk the market next time round:
Will they be resurrected if similar circumstances arise in the future? Excellent central bank co-operation and strong leadership were involved on this occasion. However, we have seen their existence challenged in political discussion in the US. And remember that, although this time it was dollar liquidity that was needed around the globe, next time it might be other currencies. And then there is the issue of access criteria. Who gets a swap line and who does not?
Should the provision of international liquidity be subject to the decision of one national central bank?
Indeed, one might argue, the unilateral actions of the SNB are now causing worrying distortions in the FX basis swap markets. Note the two-month CHFUSD basis swap, which has plunged to levels of as much as minus 197 basis points:
That, of course, makes it extremely cheap to borrow Swiss francs against dollars. Conversely it also makes it really expensive to borrow dollars against Swiss franc — a fact which may or may not be filtering through to EURUSD basis swap markets in their own right, pushing rates high enough to make dollar tapping from the ECB and SNB attractive again?
So what are the alternatives? Guðmundsson has one idea:
Certainly, one of them is that the international financial system would change as a result of the problems revealed in the international monetary system. This would entail the contraction of cross-border banking through market processes, with subsidiarisation and local funding being part of it, but also as countries adopt measures to deal with risks by restricting international activities of home banks and placing more strict prudential limits on currency mismatches and foreign currency maturity mismatches. For example, when Iceland lifts its current capital controls on outflows, it will probably impose restrictions on both size and composition of the foreign currency balance sheets of home-headquartered banks. Some might see such restrictions as capital controls in another form, but I see them as prudential rules.
Or alternatively still:
Another currently discussed alternative is to strengthen the IMF as an international LOLR and, in the process, enhance the role of the SDR as a reserve asset. It would involve making the supply of SDR more elastic and the process more conducive to managing international liquidity. In the grander visions, the SDR would run parallel to the USD as a reserve currency and potentially replace it. Such an arrangement would be a move in the direction of Keynes’ original idea of an international clearing union and its currency, the Bancor. This idea merits further research and full discussion, and I note that the IMF is doing substantial work in this area.
Which identifies an entirely different potential policy action to look out for from the Jackson Hole bankers this week.
http://ftalphaville.ft.com/blog/2011/08/23/660251/fx-swap-lines-to-the-rescue/
LINKS - GLOBAL ECONOMY - GLOBAL CURRENCY ...
CURRENCY SWAPS 2008-2009-2010 LINKS ~
