Fed’s currency-swap deals - monster in the making?
Bernanke’s decision to unfreeze markets in emerging nations raises questions
By WILLIAM PESEK JR 4 November 2008
The first interest-rate cut in seven years had to be trauma-tic for Bank of Japan (BOJ) staff. Not only did it undo years of struggling to lift borrowing costs from zero, but few investors seemed to care. The indifference is partly attributable to the tardiness of the 0.2 percentage-point move, which lowered the BOJ’s benchmark rate to 0.3 per cent.
The bigger reason was the US Federal Reserve. The Fed’s half-point rate cut to one per cent last week came two days before the BOJ’s move, and it surprised no one. What shocked many was a decision to provide US$30 billion each to the central banks of Brazil, Mexico, Singapore and South Korea.
The internationalisation of the Fed has been unfolding for years. From Seoul to Santiago, investors often care more about what happens in Washington than they do about actions taken by the local monetary authorities. The central bank has 12 districts across the United States, yet the last 15 years have seen the creation of de facto spheres of Fed influence around the globe.
Consider Oct 29 as the day the Fed formalised the arrangement by creating areas 13, 14, 15 and 16. The Fed’s decision to expand efforts to unfreeze markets in emerging nations raised eyebrows in Asia, eclipsing its rate reduction and that of the BOJ.
The International Monetary Fund (IMF) also announced an emergency loan programme that almost doubles borrowing limits for emerging economies and waives demands for austerity measures. That, too, surprised many observers.
The IMF signalled that it will move faster with aid than in the past. It also showed the urgent need for an overhaul of the global financial order well before a Nov 15 meeting of 20 industrialised and developing nations in Washington.
Five years from now, Fed chairman Ben Bernanke will be regarded either as brilliant or reckless for so directly reaching around the globe. At the moment, it looks like an innovative and bold step. Already, it’s done more to stop the bleeding in markets than have officials in, say, Seoul.
It’s one thing to accept euros, yen, pounds or Swiss francs in these kinds of ‘liquidity swap facilities’. It’s quite another to accept emerging-market currencies. The Fed is bestowing its ‘Good Housekeeping’ seal on economies that are following responsible policies yet are feeling the brunt of the credit crisis.
This activity raises a number of questions about what US authorities are up to. Here are three relevant to Asia.
One, is the Fed playing geopolitics? Since the US created the problems oozing around the globe, it should help others deal with them. That’s especially true if the US wants to have any friends a year from now.
The Fed had already created similar swap lines with the European Central Bank and monetary authorities in Australia and New Zealand. It is now extending the courtesy to ‘four large systemically important economies’ in the developing world.
‘There is another signal being sent: Being a friend of the US still matters,’ Marc Chandler, global head of currency at Brown Brothers Harriman & Co in New York, wrote in an Oct 30 report. ‘Venezuela, Argentina and Russia, for example, are unlikely to be thought of as likely candidates for a similar swap programme with the Fed. Over time, who is regarded as a friend of the US may impact valuations.’
Two, is the Fed helping the IMF or undermining it? It’s more the former than the latter. In recent weeks, Iceland approached Russia for loans before going to the IMF, while Pakistan sought help from China. With US$1.9 trillion of reserves, China might easily supplant the role of the IMF and US Treasury in Asia.
Those overtures, even if unsuccessful, didn’t go unnoticed by US officials. Many observers wonder if they were among the catalysts behind the Fed’s and IMF’s actions last week.
‘It has been fashionable to argue that the crisis would increase China’s financial influence, as China sits on a tonne of foreign exchange and potentially offered an alternative source of foreign-currency liquidity,’ Council on Foreign Relations economist Brad Setser in New York wrote on his blog last week.
And yet that hasn’t happened. The US and Europe moved quickly, at least by the standards of governments, to help a broad range of countries. ‘China’s rise, in effect, contributed to a change in the political climate that helped to lift some of the political constraints that in the past limited the IMF’s scope,’ Mr Setser argued.
Third, how does the Fed turn off this new spigot? An international precedent clearly has been set, one that may create even greater expectations next time there’s a crisis.
For all its troubles, the US dollar is still the world’s reserve currency, and central banks in Beijing, Tokyo, New Delhi, Taipei and Seoul hold mountains of US notes. If the dollar plunges because the Fed cuts rates further, those holding US currency also may expect Fed bailouts.
Only time will tell if Mr Bernanke created an international monster here. For the time being, Asia’s emerging markets are all too happy to accept the Fed’s seal of approval.
William Pesek is a Bloomberg News columnist. The opinions expressed are his own
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Fed’s currency-swap deals - monster in the making?
Bernanke’s decision to unfreeze markets in emerging nations raises questions
By WILLIAM PESEK JR
4 November 2008
The first interest-rate cut in seven years had to be trauma-tic for Bank of Japan (BOJ) staff. Not only did it undo years of struggling to lift borrowing costs from zero, but few investors seemed to care. The indifference is partly attributable to the tardiness of the 0.2 percentage-point move, which lowered the BOJ’s benchmark rate to 0.3 per cent.
The bigger reason was the US Federal Reserve. The Fed’s half-point rate cut to one per cent last week came two days before the BOJ’s move, and it surprised no one. What shocked many was a decision to provide US$30 billion each to the central banks of Brazil, Mexico, Singapore and South Korea.
The internationalisation of the Fed has been unfolding for years. From Seoul to Santiago, investors often care more about what happens in Washington than they do about actions taken by the local monetary authorities. The central bank has 12 districts across the United States, yet the last 15 years have seen the creation of de facto spheres of Fed influence around the globe.
Consider Oct 29 as the day the Fed formalised the arrangement by creating areas 13, 14, 15 and 16. The Fed’s decision to expand efforts to unfreeze markets in emerging nations raised eyebrows in Asia, eclipsing its rate reduction and that of the BOJ.
The International Monetary Fund (IMF) also announced an emergency loan programme that almost doubles borrowing limits for emerging economies and waives demands for austerity measures. That, too, surprised many observers.
The IMF signalled that it will move faster with aid than in the past. It also showed the urgent need for an overhaul of the global financial order well before a Nov 15 meeting of 20 industrialised and developing nations in Washington.
Five years from now, Fed chairman Ben Bernanke will be regarded either as brilliant or reckless for so directly reaching around the globe. At the moment, it looks like an innovative and bold step. Already, it’s done more to stop the bleeding in markets than have officials in, say, Seoul.
It’s one thing to accept euros, yen, pounds or Swiss francs in these kinds of ‘liquidity swap facilities’. It’s quite another to accept emerging-market currencies. The Fed is bestowing its ‘Good Housekeeping’ seal on economies that are following responsible policies yet are feeling the brunt of the credit crisis.
This activity raises a number of questions about what US authorities are up to. Here are three relevant to Asia.
One, is the Fed playing geopolitics? Since the US created the problems oozing around the globe, it should help others deal with them. That’s especially true if the US wants to have any friends a year from now.
The Fed had already created similar swap lines with the European Central Bank and monetary authorities in Australia and New Zealand. It is now extending the courtesy to ‘four large systemically important economies’ in the developing world.
‘There is another signal being sent: Being a friend of the US still matters,’ Marc Chandler, global head of currency at Brown Brothers Harriman & Co in New York, wrote in an Oct 30 report. ‘Venezuela, Argentina and Russia, for example, are unlikely to be thought of as likely candidates for a similar swap programme with the Fed. Over time, who is regarded as a friend of the US may impact valuations.’
Two, is the Fed helping the IMF or undermining it? It’s more the former than the latter. In recent weeks, Iceland approached Russia for loans before going to the IMF, while Pakistan sought help from China. With US$1.9 trillion of reserves, China might easily supplant the role of the IMF and US Treasury in Asia.
Those overtures, even if unsuccessful, didn’t go unnoticed by US officials. Many observers wonder if they were among the catalysts behind the Fed’s and IMF’s actions last week.
‘It has been fashionable to argue that the crisis would increase China’s financial influence, as China sits on a tonne of foreign exchange and potentially offered an alternative source of foreign-currency liquidity,’ Council on Foreign Relations economist Brad Setser in New York wrote on his blog last week.
And yet that hasn’t happened. The US and Europe moved quickly, at least by the standards of governments, to help a broad range of countries. ‘China’s rise, in effect, contributed to a change in the political climate that helped to lift some of the political constraints that in the past limited the IMF’s scope,’ Mr Setser argued.
Third, how does the Fed turn off this new spigot? An international precedent clearly has been set, one that may create even greater expectations next time there’s a crisis.
For all its troubles, the US dollar is still the world’s reserve currency, and central banks in Beijing, Tokyo, New Delhi, Taipei and Seoul hold mountains of US notes. If the dollar plunges because the Fed cuts rates further, those holding US currency also may expect Fed bailouts.
Only time will tell if Mr Bernanke created an international monster here. For the time being, Asia’s emerging markets are all too happy to accept the Fed’s seal of approval.
William Pesek is a Bloomberg News columnist. The opinions expressed are his own
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