Fed swap lifeline to emerging market banks
By Jon Fernquest
Two
days ago George Soros suggested: "the central banks at the
centre
[of the world financial system] should open large swap lines
with the central banks of qualifying countries at the
periphery [of
the world financial system]" (See Financial Times, 28-10-08,
link). In other words, the US should open currency swap lines with emerging market economies (See map on right with emerging market economies in blue and fully developed economies in red).
This is exactly what happened today.
The US central bank (The Fed) opened large swap lines with the central banks of four economies:
1. Brazil
- Banco Central do Brasil
2. Mexico - Banco de Mexico
3. South Korea - Bank of Korea
4. Singapore - Monetary Authority of Singapore
(Source: Federal Reserve Announcement, 29-10-08, link)
2. Mexico - Banco de Mexico
3. South Korea - Bank of Korea
4. Singapore - Monetary Authority of Singapore
(Source: Federal Reserve Announcement, 29-10-08, link)
Why?
"These facilities...are designed to help improve liquidity conditions in global financial markets and to mitigate the spread of difficulties in obtaining U.S. dollar funding in fundamentally sound and well managed economies."
Basically, outflows of investment funds from emerging market economies and their currencies back to the safe haven of the US dollar have "created massive demand for dollars and a reduction of liquidity in other currencies."
These swap lines will expand foreign- exchange reserves and help stabilize the currency markets in these countries.
The swap lines restore liquidity and avoid a vicious negative spiral.
How?
Dani Rodrick presents what he calls the "emerging market dilemma"
* A banking crisis calls for cutting interest rates (easy money policy)
* An exchange-rate crisis calls for hiking interest rates (monetary tightening).
* When you have both sorts of crises what do you do?
He quotes the well-known book of current Fed Chairman Ben Bernanke on the recession economy of the 1930s:
A
particularly destabilizing aspect [during the crisis] was the tendency
of fears about the soundness of banks and expectations of exchange-rate
devaluations to reinforce each other... An element that the
two type of crises had in common was the so-called "hot money,"
short-term deposits held by foreigners in domestic banks. On
one hand, expectations of devaluation
induced outflows of the hot-money deposits (as well as flight by domestic
depositors), which threatened to trigger general bank runs.
On the other hand, a fall in confidence in a domestic banking system
(arising, for example, from the failure of a major bank) often led to
flight of short-term capital from the country, draining reserves
.... Other than abandoning the parity altogether, central banks could do little in
the face of banking and exchange-rate crises, as the former seemed to
demand easy money policies while the latter required monetary tightening.
He continues:
Include
corporates along with domestic banks among the affected entities,
change the language to take into account that what is at stake is
not a draining of reserves but uncontrolled
currency depreciation, and you have a pretty good
description of the dilemma faced by most EMs [Emerging Markets] at the
moment.
(Source: Dani Rodrick's Blog, 28-10-08, link)
Vocabulary:
the center - in any country there economic and political centers (e.g. Bangkok) ศูนย์กลางthe periphery - far away from the center ขอบเขต ขอบนอก
at the centre (of the world financial system) -
at the periphery (of the world financial system) -
mitigate X - make something bad, less serious, dangerous, or painful บรรเทา ทำให้เบาบางลง
mitigate the spread of difficulties in obtaining U.S. funding ลดผลกระทดหรือปัญหาในการได้เงินลงทุนจากอเมริกา
sound - healthy แข็งแรง
fundamentally sound and well-managed economies เศรษฐกิจที่มีการบริหารจัดการอย่างดีและมีรากฐานที่แข็งแรง
a lifeline - emergency action, save a person from drowning in the water and dieing ช่วยชีวิต
an emerging market economy - a better way to say advanced developing economy (See Wikipedia)
a currency swap - when two sides exchange a large amount of money in two different currencies for a period of time as well as the interest payments on these sums of money การสว๊อปเงินในสกุลกต่างๆ
liquidity - the ability to reduce assets to cash quickly by selling them without losing money (when confidence collapses and everyone is selling this is difficult) สภาพคล่อง
a reduction of liquidity มีสภาพคล่องน้อยลง
foreign exchange reserves - foreign currencies held by a country's central bank เงินตราต่างประเทศที่มีสำรองไว้ในธนาคารแห่งประเทศไทย
stabilize currency markets - prevent exchange rates (price of currency) from moving up and down a lot by large amounts (volatility) รักษาอัตราแลกเปลี่ยนไว้ให้อยู่คงที่
a vicious negative spiral - when things get worse and worse, each bad situation creating the conditions for more and worse bad situations วงจรอุบาทก์
a dilemna - a difficult choice between two alternatives ภาวะวิกฤต
Dani Rodrick - well-known development economist and public intellectual at the John F. Kennedy School of Government at Harvard (See Wikipedia and blog)
a banking crisis - a loss of confidence in the banking system with people trying to withdraw their money from the system (bank runs) and banks prefer to keep their funds in cash rather than lend them out วิกฤตทางธนาคาร
an exchange rate crisis - when a currency becomes less valuable (depreciates) uncontrollably making it difficult for a country to pay back its foreign loans and obtain the foreign currencies such as the dollar necessary to do business วิกฤตค่าเงินตราต่างประเทศ
easy money policy - monetary policy by the central bank that tends to increase the money supply and credit in the economy, usually by reducing interest rates, this tends to increase economic activity in the economy and lead to higher growth but higher inflation
monetary tightening - monetary policy by the central bank that tends to reduce the money supply and credit in the economy, usually by raising interest rates, this tends to reduce economic activity in the economy and lead to lower growth and reduced inflation
hot money - investment money that enters countries quickly and leaves quickly looking for profit opportunities (speculation) การเก็งกำไร
induce - cause ก่อให้เกิด
flight - run away from a place หนีออกไป
draining reserves - under the old system of fixed exchange rates banking system reserves such as gold flowed from one country to another to settle trade imbalances.
what is at stake - what could be lost or gained อยู่ในความเสี่ยงว่าจะได้หรือเสีย
uncontrolled currency depreciation - when the value of a currency falls continuously and cannot be controlled การที่ค่าเงินบาทลดต่ำลงจนควบคุมไม่ได้
