Chatter About the Fed/ECB CCY Swap Line

This one’s for the bloggers-

Dollar swap lines are functionally unsecured loans to foreign govts. that the Fed can do unilaterally. Congress only finds out well after the fact. Last time around they did $600 billion, including lending (unsecured) to nations Congress never would have approved.

The problem is the Fed Chairman insists they are secured because we get local currency deposits at the foreign central bank as collateral.

That’s like putting up your watch as collateral for a loan but you still wear it.

Chatter About the Fed/ECB CCY Swap Line
If reinstituted, it is a basic spot/forward FX trading line.

What this does is to give the ECB the power to lend USD in Europe. It
has 2 potential benefits:

1.Not all banks in Europe who require USD funding has access to the Fed
or the FF market

2.They don’t have to wait until NY opens if panic breaks out in Europe
over USD funding.

There is a third benefit. Politics. It let’s the market know that the
central banks are on the case, and the Fed doesn’t want to see the
FRA-OIS spread spin out of control.

what is gong on with swap spreads this am?

Fed also re opening swap lines to ECB – looks ready to do more unsecured dollar lending to them and maybe others.

They look to be doing what they did last time around to keep libor down – lend unsecured to bad credits. High risk but it does get rates down.

On Fri, Apr 30, 2010 at 12:23 PM, Jason wrote:

Confluence of events..


Month end bid for treasuries
Goldman stock down 14 and financial CDS wider creating some fears for financial sector
Greece flight to quality concerns going into the weekend

Fed to begin expanding the Term deposit facility which will remove excess cash and remove downward pressure on term LIBOR

LIBOR quoted for Monday as 35.375 / 35.5 +1

1y OIS-LIBOR 5 day chart:





Result

2y spreads leading the way wider +5 to 23.5

Still cheap though

Press Release
Release Date: April 30, 2010


For immediate release
The Federal Reserve Board has approved amendments to Regulation D (Reserve Requirements of Depository Institutions) authorizing the Reserve Banks to offer term deposits to institutions that are eligible to receive earnings on their balances at Reserve Banks. These amendments incorporate public comments on the proposed amendments to Regulation D that were announced on December 28, 2009.

Term deposits, which are deposits with specified maturity dates that are held by eligible institutions at Reserve Banks, will be offered through a Term Deposit Facility (TDF). Term deposits will be one of several tools that the Federal Reserve could employ to drain reserves when policymakers judge that it is appropriate to begin moving to a less accommodative stance of monetary policy. The development of the TDF is a matter of prudent planning and has no implication for the near-term conduct of monetary policy.

The amendments approved by the Board are a necessary step in the implementation of the TDF. As noted in the attached Federal Register notice, the Federal Reserve anticipates that it will conduct small-value offerings of term deposits under the TDF in coming months to ensure the effective operation of the TDF and to help eligible institutions to become familiar with the term-deposit program. More detailed information about the structure and operation of the TDF, including information on the steps necessary for eligible institutions to participate in the program, will be provided later.

The amendments will be effective 30 days after publication in the Federal Register, which is expected shortly.

OPEC April Crude Output Up 25,000 Bbl/Day to 29.19 Mln

No sign the price hikes are coming from demand pressures.

It’s just the saudis hiking price, thinly masked by the news headlines and passive commodity buyers they use for ‘cover’ so no fingers get pointed in their direction

— Original Sender: NLRT ALERT, BLOOMBERG/ 731 LEXIN —

—– Original Message —–
From: NLRT ALERT (BLOOMBERG/ 731 LEXIN)
At: 4/30 2:21:45

OPEC April Crude Output Up 25,000 Bbl/Day to 29.19 Mln

The attached story matches the criteria for the News Alert named “OPCR”. Type {97 } to view the story on wire BN (BLOOMBERG News).

Your keyword(s) were found in the story’s headline.
————————————————–
OPEC April CRUDE OUTPUT Up 25,000 Bbl/Day to 29.19 Mln

It’s not too late for Greece

It remains my contention that Greece can dramatically upgrade its new securities simply by putting a provision in the default section that states that in the case of default the bearer, on demand, can use the securities at maturity value plus accrued interest to pay Greek government taxes. This makes the debt ‘money good’ for as long as there is a Greek government that levies taxes.

This would allow Greece to fund itself a low interest rates. It would also be an example for the rest of the euro zone and thereby ease the funding pressures on the entire region.

However, it would also introduce a new ‘moral hazard’ issue as this newly found funding freedom, if abused, could be highly inflationary and further weaken the euro.

Spread the word!

Moody’s likely to downgrade Greece and Brazil buying more $

Seems no one wants a strong currency anymore, but instead wants to keep their real wages down.

So fears of a dollar crash seem again to be overblown.

Nor is there any immediate risk of inflation from excess demand.

The cost push risk from the Saudis hiking prices remains, and so price is unpredictable with demand relatively flat

The situation in Greece seems to be binary, based on political decisions.

Also markets are already discounting maybe a third of what happens if they get it wrong.
So betting one way or the other has a lower risk/reward than a few weeks ago.

US economy looking internally ok with risks remaining external- greece, china, etc.

On Thu, Apr 29, 2010 at 3:09 PM, EDWARD wrote:
BBG:
‘ Moody’s said it has previously indicated that a “multi-
notch downgrade” is likely and the specific lowering “will
depend on the level of ambition of the multi-year economic and
fiscal program.”’

BRL:
*BRAZIL’S TREASURY DOLLAR PURCHASES HINGE ON REAL STRENGTH
*BRAZIL’S TREASURY MAY DOUBLE DOLLAR PURCHASES TO PAY DEBT
*BRAZIL DOLLAR PURCHASES TO STEM CURRENCY’S RALLY, AUGUSTIN SAYS
*CORRECT: BRAZIL TREASURY MAY STEP UP DOLLAR PURCHASES
*BRAZIL SOVEREIGN FUND TO BE USED WHEN NECESSARY, AUGUSTIN SAYS
*BRAZIL SOVEREIGN FUND MAY BUY FOREIGN CURRENCY, AUGUSTIN SAYS

It appears that the sovereign fund will be used as a mechanism to affect the BRL and thus policy tool of the government from these headlines (which seems a little odd for sovereign wealth fund whose assets were acquired by foreign exchange policy implementation, unless they are talking about investing in USD assets along with USD buying). More details/clarification to follow.

Claims/Eur Gwth Surprise?


Karim writes:
Initial claims fell 11k to 448k, lowest level in 1mth.
Anecdotes supporting further declines ahead:

  • VIACOM CEO SAYS ECONOMY IS GROWING STRONGER EACH DAY
  • Caterpillar CEO: “We enjoy hiring people and growing our business, and we’re delighted to see that opportunity coming back”

EU Sentiment and Manufacturing surveys for April out today and quite strong (except for Greece)

  • Of note is stock of inventories at all-time low while new orders and production are rising
  • Wouldn’t be surprised to see 5-6% GDP growth in Q2 for Europe; of course may not be sustainable due to fiscal issues,etc, but should still be a surprise

Yes, if the ECB, for example, simply guaranteed the national govt debt it would work reasonably well. The automatic stabilizers would get the deficits to as high as needed to restore growth and employment.

But that would introduce the moral hazard issue, as whoever ran the largest deficit would be the winner in real terms, in an inflationary race to the bottom.

So they don’t want to remove the ‘market discipline’ aspect even though a nation can become insolvent before the deficit has a chance to get high enough to turn things around.

Re: Run on European Banks?

>   
>   (email exchange)
>   
>   On Wed, Apr 28, 2010 at 8:23 AM, wrote:
>   
>   Given this view warren, do you think Natl Bk of Greece goes to zero here?
>   Or do you think Europe will do a “shock an awe” 100b package that makes
>   greek banks a buying opportunity?
>   

Wish I knew!

They might like to, but they still don’t have an answer to the moral hazard issue or popular support for a ‘bailout’

What’ they’d like to do is figure out a way to isolate Greece, hence the presumed proposals from yesterday, but those aren’t satisfying either.

And any major package weakens the others who have to fund it in the market place.

Nor do they have a way to enforce their austerity demands and keep them from being reversed once it’s known they’ve taken the position that it’s too risky to let any one nation fail.

They are still in a bind, and their austerity measures mean they don’t keep up with a world recovery

Also, a Greek restructure that reduces outstanding debt is a force that strengthens the euro as it reduces outstanding euro financial assets.

The negative is that it further reduces euro ‘savings desires’ and drives more portfolios to shift away from euro.

And domestic taxes are still payable in euro, so there is that fundamental support .

Again, could go either way from here.

Sometimes that’s how it is!