♠ Posted by Emmanuel in Credit Crisis,Hegemony
at 10/30/2008 10:56:00 AM
OK, so the post title is idiotic (but catchy!) I can explain the former, though the latter is beyond the scope of this blog's coverage. Anyway, to no one's real surprise, the US Fed has cut the federal funds rate to 1.00%. Skeptics like myself naturally ask, "If several economic commentators attribute the housing crisis to Greenspan cutting this rate to 1.00% and keeping it there for a while after the Internet bubble burst, how can this action help? You can of course say that, having been burned bigtime before, banks will be more circumspect this time around. I certainly hope so, but there is always the possibility that as money flows more freely once again, there will be another bubble in the offing: tech stocks...real estate...heaven knows what next.While we await the results of this latest Fed reflation play, something that seems to have brought more immediate benefits is the Federal Reserve establishing $30B swap lines with the likes of Brazil, Mexico, South Korea, and Singapore. There are surely political-economic reasons for choosing these countries; While it's true that Mexico and South Korea have had their share of troubles in recent times, Brazil and Singapore are on more solid footing relatively speaking. Dave Altig at the (newly resurrected!) Macroblog has a neat explanation of how these currency swaps work. Basically, a country having trouble obtaining FX funding swaps the domestic currency for a foreign currency at the prevailing exchange rate to help tide over its current FX funding needs. At an agreed date, the process is reversed, with the future exchange rate determined by the interest rate differential between both currencies.
Brad Setser has already spoken of how beneficial these swap lines have been to European countries, enabling them to avoid funding problems currently afflicting many developing countries despite the former having problems with their financial institutions that are, if anything, larger than those of many LDCs'. To the FRB press release, then:
Today, the Federal Reserve, the Banco Central do Brasil, the Banco de Mexico, the Bank of Korea, and the Monetary Authority of Singapore are announcing the establishment of temporary reciprocal currency arrangements (swap lines). These facilities, like those already established with other central banks, 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.One of the principal discussions in IPE concerns hegemony, or if a single country still maintains the "rules of the game" which others must observe whether they like them or not (see the ever-useful "What is IPE?") It is of course no surprise that I am one of the naysayers in the argument over whether the US still maintains hegemony. OTOH, those of a different opinion that the US maintains this stature can reason that, by extending swap lines, the US can singlehandedly improve the economic fortunes of other countries. Certainly, the aforementioned countries with newly-established swap lines are now faring better. Here is news from South Korea:
In response to the heightened stress associated with the global financial turmoil, which has broadened to emerging market economies, the Federal Reserve has authorized the establishment of temporary liquidity swap facilities with the central banks of these four large and systemically important economies. These new facilities will support the provision of U.S. dollar liquidity in amounts of up to $30 billion each by the Banco Central do Brasil, the Banco de Mexico, the Bank of Korea, and the Monetary Authority of Singapore.
These reciprocal currency arrangements have been authorized through April 30, 2009. The FOMC previously authorized temporary reciprocal currency arrangements with ten other central banks: the Reserve Bank of Australia, the Bank of Canada, Danmarks Nationalbank, the Bank of England, the European Central Bank, the Bank of Japan, the Reserve Bank of New Zealand, the Norges Bank, the Sveriges Riksbank, and the Swiss National Bank.
Separately, the Federal Reserve welcomes the announcement today by the International Monetary Fund of the establishment of the Short-Term Liquidity Facility, which is designed to help member countries that are facing temporary liquidity problems in the global capital markets. The Federal Reserve is supportive of the IMF's role in helping countries address and resolve their ongoing economic and financial difficulties.
South Korea's stock index rose by a record and the won surged after the central bank signed a $30 billion currency swap with the Federal Reserve and President Lee Myung Bak said he's ready to take more steps to aid the economy.And here is news from Singapore:
The swap line is part of the Federal Reserve's efforts to alleviate a credit freeze in emerging nations, with the U.S. also providing dollars to Singapore, Brazil and Mexico. Korean lawmakers today approved the government's $100 billion guarantee of bank debts to help lenders struggling to access foreign funds.
Korea's currency jumped 14 percent, the most in a decade, as policy makers' actions allayed concern the nation was headed for a repeat of 1997, when it needed an International Monetary Fund bailout to help repay offshore debt. The Fed's dollar provisions are part of increased global endeavors to thaw money markets, with Hong Kong and Taiwan lowering interest rates today following cuts yesterday by the U.S. and China.
``This is the strongest measure so far,'' said Chang In Whan, chief executive officer of KTB Asset Management Co. in Seoul, which manages the equivalent of $4.3 billion in equities. The Fed deal ``will create a buffer for Korea's foreign- currency supply and improve foreigners' confidence in the country,'' Chang said. ``It shows the Fed won't just sit back and watch overseas markets go down.''
Default protection costs on South Korean government debt fell by the most in more than four years. Five-year credit- default contracts on the country's external debt fell 130 basis points to 435, according to a Bloomberg survey of three dealers.
Singapore stocks led the surge in Southeast Asian equity markets on Thursday, with financials in the spotlight, as investors cheered the Federal Reserve's rate cut and a slew of government efforts to boost bank liquidity.It will be interesting to see what happens in Brazil and Mexico when their markets open.
The benchmark Straits Times Index closed 7.8 percent higher at 1,801.91, with a heavy 1.84 billion shares changing hands.
