Virgil
02-01-2009, 08:55 PM
http://online.barrons.com/article/SB123336877483535797.html
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SATURDAY, JANUARY 31, 2009
FEATURES MAIN
Europe's Growing Crisis Puts the Fed at Risk
By JACK WILLOUGHBY | MORE ARTICLES BY AUTHOR
European central banks are at risk of defaulting on their currency swaps with the U.S. Federal Reserve, unless major banks on the Continent can find some way to stabilize their deteriorating balance sheets.
TO AID THEIR AILING COMMERCIAL banks, central banks in Europe have relied on huge currency swaps, borrowing nearly $400 billion from the U.S. Federal Reserve. But as European commercial banks and European currencies deteriorate, repaying all that money to the Fed is becoming ever more difficult.
"[Fed Chairman Ben] Bernanke's assurances aside, I don't see how they can easily be repaid," warns Gerald O'Driscoll, senior fellow with the Cato Institute and formerly with Citigroup and the Dallas Fed.
Here is how the swaps work. The Fed and, say, the European Central Bank agree to exchange a set amount of each other's currencies at a certain exchange rate for six months, with a provision to renew the terms at maturity. The ECB uses the money to help aid bank-bailout packages for countries like Belgium, Finland, Hungary and Ireland that have troubled dollar-based assets. (Asian central banks are also part of the program, but haven't utilized it nearly as heavily.) The Fed gets a promise from the ECB to repay the debt in six months.
A big hitch: Europe's commercial banks have more exposure to wounded emerging markets than U.S. counterparts. By one estimate, European banks provided three-quarters of the $4.7 trillion in cross-border loans to the Baltic countries, Eastern Europe, Latin America and emerging Asia. Their emerging-markets exposure exceeds that of U.S. lenders to Alt-A and subprime loans.
THE SWAPS MAY MERELY delay the inevitable major shake-up of Europe's banking system, O'Driscoll fears, and move the U.S. Fed beyond its original operating brief. Adds Neil Mellor, currency strategist at Bank of New York Mellon: "The aftershocks of the current global credit crisis are continuing to induce huge turbulence in the foreign-exchange markets, which is only now being more keenly felt in the eurozone and Britain."
You can debate the merits, but not the size of the swaps program. It is big. The Fed's currency swaps have expanded from zero a year ago to $506 billion. Of the 14 central banks involved, the ECB by far has been the biggest counterparty to date, drawing down $264 billion (versus Mexico's $33 billion drawdown via a similar program at the height of the 1995 peso crisis). Skeptics contend that the swaps are thinly disguised spending that was carried out without Congressional approval.
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==========
SATURDAY, JANUARY 31, 2009
FEATURES MAIN
Europe's Growing Crisis Puts the Fed at Risk
By JACK WILLOUGHBY | MORE ARTICLES BY AUTHOR
European central banks are at risk of defaulting on their currency swaps with the U.S. Federal Reserve, unless major banks on the Continent can find some way to stabilize their deteriorating balance sheets.
TO AID THEIR AILING COMMERCIAL banks, central banks in Europe have relied on huge currency swaps, borrowing nearly $400 billion from the U.S. Federal Reserve. But as European commercial banks and European currencies deteriorate, repaying all that money to the Fed is becoming ever more difficult.
"[Fed Chairman Ben] Bernanke's assurances aside, I don't see how they can easily be repaid," warns Gerald O'Driscoll, senior fellow with the Cato Institute and formerly with Citigroup and the Dallas Fed.
Here is how the swaps work. The Fed and, say, the European Central Bank agree to exchange a set amount of each other's currencies at a certain exchange rate for six months, with a provision to renew the terms at maturity. The ECB uses the money to help aid bank-bailout packages for countries like Belgium, Finland, Hungary and Ireland that have troubled dollar-based assets. (Asian central banks are also part of the program, but haven't utilized it nearly as heavily.) The Fed gets a promise from the ECB to repay the debt in six months.
A big hitch: Europe's commercial banks have more exposure to wounded emerging markets than U.S. counterparts. By one estimate, European banks provided three-quarters of the $4.7 trillion in cross-border loans to the Baltic countries, Eastern Europe, Latin America and emerging Asia. Their emerging-markets exposure exceeds that of U.S. lenders to Alt-A and subprime loans.
THE SWAPS MAY MERELY delay the inevitable major shake-up of Europe's banking system, O'Driscoll fears, and move the U.S. Fed beyond its original operating brief. Adds Neil Mellor, currency strategist at Bank of New York Mellon: "The aftershocks of the current global credit crisis are continuing to induce huge turbulence in the foreign-exchange markets, which is only now being more keenly felt in the eurozone and Britain."
You can debate the merits, but not the size of the swaps program. It is big. The Fed's currency swaps have expanded from zero a year ago to $506 billion. Of the 14 central banks involved, the ECB by far has been the biggest counterparty to date, drawing down $264 billion (versus Mexico's $33 billion drawdown via a similar program at the height of the 1995 peso crisis). Skeptics contend that the swaps are thinly disguised spending that was carried out without Congressional approval.
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