Speaking of Greece…

ECB, Federal Reserve, swap lines, Greece, Euro

ECB, Federal Reserve, swap lines, EuroIf you think that the Fed isn't involved in the Greek mess, you may want to think again.  Paul-Martin Foss, our good friend at the Carl Menger Center, wrote a very nice post a few days ago concerning how the Fed may be getting itself tangled-up in an impending Greek default, through its swap lines with the ECB.

According to the Federal Reserve Board of Governors, those swap lines were first established in December 2007 "to improve liquidity conditions in U.S. and foreign financial markets by providing foreign central banks with the capacity to deliver U.S. dollar funding to institutions in their jurisdictions during times of market stress."

Those original swap facilities, never meant to be permanent, were shut-down in February 2010.  But — wouldn't you know it? — similar facilities were announced in May 2010 in response to "the re-emergence of strains in short term funding markets in Europe."  Those facilities were also supposed to be temporary, but then, in October 2013 — what do you know! — they were made permanent. According to the Fed, that step

further supports financial stability by reducing uncertainties among market participants as to whether and when these arrangements would be renewed.  This action results from the ongoing cooperation among these central banks to help maintain financial stability and confidence in global funding markets.

What has all this got to do with Greece?  Here is Paul-Martin:

If you want to get a sense of the Fed’s involvement in Europe, watch the swap lines.  Swap line data is published every Thursday afternoon on the Fed’s balance sheet, the H.4.1 release.  If you look at the St. Louis Fed’s charts and data on swap lines, you’ll see the huge amount of swaps during the financial crisis, and then a smaller but still significant increase in swap lines during the first iteration of the Greek financial crisis back in 2012.  While swaps have been relatively non-existent this year, there was a small blip back in April, likely Greek-related, and more importantly, another blip this week.  While the amount, $114 million, is a drop in the bucket compared to what it has been in the past, this number needs to be watched.  It could very well be an indicator of the Fed getting involved in Europe again.  And if the doomsday scenario ends up taking place next week, expect that $114 million figure to skyrocket.  The Fed seems to want the conversation to revolve around a possible upcoming interest rate hike, so it’s been relatively silent on the topic of Greece and its involvement in bailing out Europe.  But even if the Fed doesn’t say anything about Greece, its money-printing to pump up the swap lines will do plenty of talking.

That was on June 19th.  Well, the CMFA's champion Fed watcher, Walker Todd (who you will be hearing from shortly on these pages) has been keeping a sharp eye on those swap lines.  On June 11th — a  week before the transaction showed up on the Fed's own H.4.1 release — Walker reported  that "Someone in Europe drew a small amount on a dollar swap with FRBNY":

ECB website today has details below on a swap line drawing this week against the US dollar swap line with FRBNY.  It says that there was one bidder; one wonders whom.  Amount is $113 million.  There has been no swap line activity for several months now.  These numbers should show up on FRBNY next week (due to timing of swap drawings and time zone differences, there usually is a one-week lag between a drawing in Europe and the FRBNY report of the same drawing).

(The $1 million difference between the numbers mentioned by Paul-Martin and Walker reflects a Bank of Japan draw of that amount.)

The day after Paul-Martin's post came out, Walker alerted us to another transaction that had not yet been reported by the Fed:

It won't show up until next week in Fed statistics, but ECB statistics show that an unnamed entity (one suspects the same one as last week) borrowed again for a week under the dollar swap line for $115 million.  The drawing was $113 million the last time I checked.  As a purely hypothetical example, a Greek bank could be borrowing dollars under the swap line.  Other than a token $1 million to $2 million that Bank of Japan borrows from time to time to reassure itself, this is the only borrowing outstanding under the Fed's swap line, according to FRBNY statistics. The notable thing is that it is still there and growing.

Today the swap was rolled over yet again.

Stay tuned… .

  • Beniamin Cole

    Nice post—but what is upshot? In a bad-case scenario, the Fed prints money and sends it to Greece? Since Greece is in a depression is that such a bad idea?

    • George Selgin

      First, the Fed's mandate doesn't include bailing out foreign banks, much less fighting depression in foreign countries. Second, because the rules (thanks to the opponents of more complete Fed audits) don't allow any outsiders to discover what use is being made with swap line credits, there is no way to determine whether they are being employed for the purposes mentioned, rather than for other, still less warranted reasons. Third, there are risks involved, that must ultimately be born by U.S taxpayers in the form of reduced Fed earnings (which mean fewer dollars rebated to the Treasury). On risk is that the European entities to which the dollars are being can't repay; the other, less likely risk is that the ECB itself can't settle the swap when it comes due. Finally, the Fed should not be contributing to Europe's already serious moral-hazard problem.

      But there is actually a still more important concern, which is that these swap lines, being subject to no statutory regulation or limitation or oversight, are a potential Trojan horse by means of which the Fed may secure lending powers that make the ones allowed to it under the 13(3) loophole appear both trivial and relatively transparent.

      • B Cole

        Interesting. Certainly transparency and simplicity are bywords of good government—central banks included.
        That said, we live in deflationary times. I think central banks have a lot leeway now to monetize bad debts.
        For that matter, if the Fed printed up enough to buy Greek debt and retire it, I think we would hardly see an inflationary ripple.

        • George Selgin

          "For that matter, if the Fed printed up enough to buy Greek debt and
          retire it, I think we would hardly see an inflationary ripple."

          Perhaps. But we would certainly see a moral hazard ripple!

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