United States Fed extends currency swaps with foreign banks
WASHINGTON: The US Federal Reserve will extend its program to make dollars available to central banks around the world through next summer, reflecting continued strains in European financial markets that could endanger the world economy in 2011.
The announcement by the Fed came amid signs that the fiscal crisis that has roiled Europe for much of the year continues apace, despite a series of efforts by the European Union, International Monetary Fund and European Central Bank to staunch it.
The Fed initially created swap lines with the European Central Bank, Bank of England, and other counterparts in advanced nations around the world during the thick of the 2007-2009 financial crisis, then resurrected the program in May 2010 when financial strains appeared in Europe. The lines were scheduled to expire Jan. 31, but now will be extended through at least Aug. 1.
Essentially, the Fed swaps dollars for euros, pounds or other currencies with a foreign central bank, which in turn can lend dollars to banks in its nation that are experiencing a shortage of dollars.
The eligible foreign central banks, which also include those in Canada, Switzerland and Japan, protect the Fed against any losses.
The program has been little-used this year, with only $60 million in outstanding lending last week (by contrast, a year earlier, the figure had been $14.4 billion).
Though the swap lines are little used now, the decision to keep them in place carries some symbolic weight, showing that the Fed stands behind efforts to address the European crisis, which Fed officials fear could affect the U.S. economy if it spirals out of control. -PB News