testing the global central bank swap network

Written on August 3rd, 2015 in politics Comments Off

Published on Perry G. Mehrling, by blog owner, July 31, 2015.

In the last few weeks, the ECB has been drawing on its liquidity swap line with the Fed, first $308 million for a week, then $658 million for a week, and last week back down to $358 million. What’s that about? … //

… Central bank swaps are different. First, the forward rate in the contract is usually exactly the same as the current spot exchange rate. This means that central banks are never in the position of realizing profits or losses from the swap (although of course there will be implicit profits and losses), that come from deviation between the agreed forward rate and the spot rate at expiry.

Second, the interest rate on the contract is negotiated rather than calculated from market prices. But, given the choice of forward rate, the analogous commercial contract would call for payment of the interest differential, so anything different from that is significant. Significantly, the documentation of the current C6 swap line leaves open the question of who pays interest to who, and how much.

Usual practice has been for the party who draws on the line to pay interest on the line at some penalty rate. Thus the May 9, 2010 swap agreement between the Fed and ECB called for the ECB to pay the USD Overnight Index Swap Rate plus 100 basis points on its dollar borrowing, and the Fed to pay nothing on its euro borrowing. In effect, the ECB was simply borrowing dollars at the discount window, like any other bank, but with its own monetary liability serving as collateral instead of some financial asset.

This kind of arrangement is still in effect a swap of IOUs but at a price that is away from the market. Central bank swap lines thus in effect operate as a kind of outside spread providing bounds within which normal commercial dealing takes place. So long as prices stay at or near CIP, private agents prefer to do business directly with each other. But when CIP comes under pressure, because of one-sided liquidity flows, the central bank moves from backstop to market-maker and the outside price becomes the market price.

The ECB is borrowing dollars from the Fed and lending them on to banks in Europe who have dollar liquidity needs. Here is the tender documentation. Presumably it is doing this for banks who are unable, for whatever reason, to access dollar funding in the open market, or only at a premium that is higher than the ECB charges … //

… (full text).

Links:

Police use force to separate pro and anti-migrant rallies at British Eurotunnel terminal, on Russia Today RT, Aug 1, 2015;

Erdogan targets Kurds, on Al-Ahram weekly online, by Sayed Abdel-Meguid in Ankara, July 30, 2015: Developments in Turkey have assumed alarming proportions amid the overlap between the government’s interventionist designs abroad and the setback it delivered to the Kurdish question;

How much Nile water? on Al-Ahram weekly online, by Mona Sewilam, July 30, 2015: She talks to experts John Rao Nyaoro and Khaled Abu Zeid about the controversial Nile River Basin Cooperative Framework Agreement;

Uploaded by OSHO International:

Die bargeldlose Gesellschaft 2015 – Andreas Popp, 9.30 min, von LEEDS 45 am 5. Juli 2015 hochgeladen;

Dirk Müller Grichenland wird absichtlich destabilisiert, 11.59 min, von blo job am 25. Juni 2015 hochgeladen;

Bilateral negotiations Switzerland-EU, on Current Concerns, by Dr. iur. Marianne Wüthrich, press conference June 24, 2015: a lot of fog and little information about the plans of the Federal Council;

Les idoles de la chanson française – mise en ligne par mon patrimoine musical, février 2015:

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