Fed Agrees $30 Billion Swap With Four Central Banks
The Federal Reserve arranged to channel $30 billion into the global financial system by opening currency swap lines with four central banks to relieve shortages of dollars in markets worldwide.
The Fed and central banks in Australia, Denmark, Norway and Sweden set up the currency exchange to address “elevated pressures'' in dollar funding in markets, the Board of Governors said today in a statement.
The U.S. is broadening its effort to revive confidence in markets amid concern a $700 billion plan to rescue the banking system may face delays in Congress. The Fed last week expanded its temporary swap lines with the European Central Bank and Swiss National Bank by $70 billion, and created $110 billion in new facilities with central banks in Japan, the U.K. and Canada.
“This is another weapon in the arsenal of governments aimed at boosting confidence,'' said Joshua Williamson, a senior strategist at TD Securities Ltd. in Sydney. “Hopefully it will help market sentiment, stop banks from hoarding cash and start greasing the wheels of the financial economy.''
After the announcement borrowing costs for Australian banks fell from the highest since Bear Stearns Cos. collapsed six months ago.
Money-Market Rates
The difference between the rate banks charge each other for three-month loans and the overnight indexed swap rate declined to 82.5 basis points as of 4:10 p.m. in Sydney from as much as 93.25 points earlier today.
The yen declined as the plan gave investors confidence to buy assets that have higher yields outside Japan. The yen fell to 155.69 per euro at 7:38 a.m. in London from 154.63 late yesterday in New York. It was at 105.92 versus the dollar from 105.56.
The programs “are designed to improve liquidity conditions in global financial markets,'' the Fed said. “Central banks continue to work together during this period of market stress and are prepared to take further steps as the need arises.''
Central bankers are trying to break a credit logjam in money markets as $522 billion in writedowns and losses tied to the U.S. mortgage market prompt bankers to hoard cash.
Preemptive Moves
“It shows the severity of the problem the Fed anticipates as we head into the last quarter of the year, and it's putting in place the infrastructure needed,'' said Venkatraman Anantha- Nageswaran, head of research at Bank Julius Baer & Co. Ltd. in Singapore. “The Fed's pre-emptive moves in setting up these swap lines suggest that it's not taking any chances.''
The Federal Open Market Committee, a group of Fed Board governors and regional reserve bank presidents, voted to authorize a swap facility totaling $10 billion each for the Reserve Bank of Australia and Riksbank in Sweden, and $5 billion each for the central banks of Norway and Denmark cash advance loan.
The Bank of Japan supplied $30 billion today to banks and brokerages in its first money-market operation since last week's $60 billion swap arrangement with the Fed.
Bank of England
The Bank of England yesterday allocated $30.1 billion in loans, its fourth overnight dollar auction and the most since it began the emergency sales last week.
“This agreement is a part of our precautionary measures and provides the Riksbank with additional flexibility to provide U.S. dollar liquidity if the need should arise,'' said Riksbank Governor Stefan Ingves in a statement on the bank's web site. “Our assessment is that financial stability in Sweden is satisfactory and that the Swedish banks are profitable and solvent.''
Swap lines were first established in December when officials joined forces to boost dollar liquidity around the world after interest-rate reductions in the U.S., the U.K. and Canada failed to ease concerns about bank lending.
Joint Action
The joint action is the latest attempt by central bankers to fight the financial crisis, which deepened last week after Lehman Brothers Holdings Inc. filed for bankruptcy and the U.S. government took over American International Group Inc.
Central banks in Frankfurt, London and Zurich this week kept up their dollar auctions to provide liquidity to financial markets.
Denmark's central bank on Sept. 22 said it's raising the issuance of Treasury bills through an extraordinary auction of as much as 25 billion kroner ($4.9 billion) to meet lender demand for secure notes. The notes can be used as collateral by so-called primary dealers to boost liquidity.
Sweden's central bank on the same day decided to loosen the rules on what collateral it will accept when lending money in order to increase liquidity. Australia pumped more than A$12 billion ($10 billion) into its banking system last week.
“The swap serves to alleviate a shortage of U.S. dollar liquidity which has affected market participants around the world including in the Asia-Pacific time zone,'' the Australian central bank said.