America’s central bank, the Federal Reserve, is engaged in a bailout of European banks. Surprisingly, its operation is largely unnoticed here.
The Fed is using what is termed a “temporary U.S. dollar liquidity swap arrangement” with the European Central Bank (ECB). There are similar arrangements with the central banks of Canada, England, Switzerland and Japan. Simply put, the Fed trades or “swaps” dollars for euros. The Fed is compensated by payment of an interest rate (currently 50 basis points, or one-half of 1%) above the overnight index swap rate. The ECB, which guarantees to return the dollars at an exchange rate fixed at the time the original swap is made, then lends the dollars to European banks of its choosing.
The two central banks are engaging in this roundabout procedure because each needs a fig leaf. The Fed was embarrassed by the revelations of its prior largess with foreign banks. It does not want the debt of foreign banks on its books. A currency swap with the ECB is not technically a loan.
Actually, The Fed claimed it was not bailing Europe out in direct conversations with Senators at a closed-door meeting.
It’s convenient that Bernanke wasn’t under oath in recorded testimony when he made those comments isn’t it?
The reality of the so-called “bailout”, however, is small. We’re talking about $60 billion, more or less, which is tiny in the grand scheme of things.
This makes one wonder “why”? If it’s just year-end shenanigans, well then it is. But what if it’s a trial balloon — to see if Congress — or anyone else — calls Bernanke on it?
If so then we better pay attention eh?