EU Bailout Footnote: Currency Swap Lines Reopened

The Federal Reserve has reopened currency swap lines with the European Central Bank. A quiet footnote to yesterday’s EU bailout announcement, the Fed and ECB said – without the support of a single voter or representative – that they would restart a market manipulation program that ended February 1st, 2010.

“This is a ready source of liquidity,” Dave Gonigam, my 5 Min. Forecast colleague explains, “for the ECB to follow through on its promises to buy up both sovereign and private debt as part of this ridiculous rescue package. How much liquidity? We don’t know, since the linchpin of the whole thing is an utterly opaque off-balance sheet entity totaling 440 billion euros.”

There’s plenty more little mundane details neither central bank will be sharing, like:

  • How greatly will this program expand the Fed’s $2.3 trillion balance sheet?
  • Will the Fed demand collateral?
  • If so, what kind? (They accepted mortgage backed securities here… What’s next, Greek bonds?)
  • Will the US money supply increase? By how much?
  • What lending rates will the Fed charge?
  • How will the proceeds be allocated?

“This is all designed to prevent a Soros ’92/Bank of England style showdown,” Rob Parenteau explains. “The ECB cannot print the foreign currency it will need to sell in order to keep the euro from free fall. Hence they are trying to present a credible threat by enlisting foreign central bank assistance via swaps.

“However, by preventing further euro depreciation, eurozone exporters will not get as much benefit. There’s only been a 15% decline from euro highs so far. They need more like 30% or more to regain global market share. And so the odds that swings in the current account balance will offset fiscal retrenchment enough to generate a return to economic growth over the next 2 years are slim to none.”

Ian Mathias
for The Daily Reckoning