When the coronavirus brought the world economy to a halt in March, it fell to the U.S. Federal Reserve to keep the wheels of finance turning for businesses across America.
And when funds stopped flowing to many banks and companies outside America’s borders—from Japanese lenders making bets on U.S. corporate debt to Singapore traders needing U.S. dollars to pay for imports—the U.S. central bank stepped in again.
The Fed has long resisted becoming the world’s backup lender. But it shed reservations after the pandemic went global. During two critical mid-March weeks, it bought a record $450 billion in Treasurys from investors desperate to raise dollars. By April, the Fed had lent another nearly half a trillion dollars to counterparts overseas, representing most of the emergency lending it had extended to fight the coronavirus at the time.
The massive commitment was among the Fed’s most significant—and least noticed—expansions of power yet. It eased a global dollar shortage, helped halt a deep market selloff and continues to support global markets today. It established the Fed as global guarantor of dollar funding, cementing the U.S. currency’s role as the global financial system’s underpinning.
Just as the Fed expanded its role in the U.S. economy to an unprecedented degree during the 2008 financial maelstrom, it has in the coronavirus crisis expanded its power and influence globally.
“The Fed has vigorously embraced its role as a global lender of last resort in this episode,” said Nathan Sheets, a former Fed economist who was the Treasury Department’s top international deputy from 2014 to 2017 and now is chief economist at investment-advisory firm PGIM Fixed Income. “When the chips were down, U.S. authorities acted.”
The value of the dollar has tumbled in recent weeks against other currencies as investors grow more troubled about the economic outlook and difficulty containing the coronavirus. Still, it is trading near levels recorded before the pandemic hit this year and above its long-term average on a trade-weighted basis, said Mark Sobel, a former U.S. Treasury Department official now at the Official Monetary and Financial Institutions Forum, a London-based think tank. Concerns that short-term declines in the dollar are an omen that its standing as the global reserve currency faces a threat are “vastly overdone,” he said.
The Fed supplied most of the money abroad via “U.S. dollar liquidity swap lines.” In essence, it lends dollars for fixed periods to foreign central banks and in return takes in their local currencies at market exchange rates. At the loans’ end, the Fed swaps back the currencies at the original exchange rate and collects interest.
By stabilizing foreign dollar markets, the Fed’s actions likely avoided even greater disruptions to foreign economies and to global markets. Those disruptions could spill back to the U.S. economy, pushing the value of the dollar higher against other currencies and damping U.S. exports—and the economy.
The risks to the Fed are minimal given that it is dealing with the most creditworthy nations and the most advanced central banks. But there are risks that investors come to expect a safety net for dollars that might lead to riskier borrowing during good times.
The Fed began deploying the swap facilities on March 15. By the end of March, it had expanded them to include 14 central banks while launching a separate program for those without swap lines to borrow dollars against their holdings of Treasurys. By May’s end, the total lent out under the programs peaked at $449 billion.
The Fed’s goal is to keep financial markets functioning, and the March events had the makings of a global panic with a resulting rush for cash. The aim was to prevent investors from dumping Treasurys and other dollar-denominated assets such as U.S. stocks and corporate securities to raise cash, which would have driven prices of those assets even lower.
‘Constructive effect’
Fed Chairman Jerome Powell in a May 13 webcast acknowledged the Fed’s global role more explicitly than his predecessors had during the last global financial crisis. The loans let foreign central banks supply dollars cheaply to their banking systems and stopped everyone in that chain from panic-selling assets like U.S. Treasurys to raise cash, he said: “It had a very constructive effect on calming down those markets and reducing the safety premium for owning U.S. dollars.”
Andrew Hauser, the Bank of England’s top markets official, in an early June speech said those swap lines “may be the most important part of the international financial stability safety net that few have ever heard of.”
On July 29, the Fed said it would extend the temporary programs, originally scheduled to end in September, through March 2021. “The crisis and the economic fallout from the pandemic are far from over,” Mr. Powell said, “and we’ll leave them in place until we’re confident that they’re no longer needed.”
The shift has brought little of the scrutiny the Fed saw during the 2008-2009 crisis. When Mr. Powell appeared before Congress for hearings in June, lawmakers didn’t ask a single question about the huge sums the central bank made available to borrowers abroad.
The Fed’s governing charter from Congress gives it the authority to operate the swap lines, which it has done in some form since 1962, when the Fed heavily debated whether it had the authority to conduct foreign-exchange operations. Congress could revoke these authorities if it didn’t approve of how the Fed was using them.
The Bank of England in April.
Photo: john sibley/ReutersThe swaps are structured so that the Fed’s foreign counterparts bear the risk of loans going bad or currency markets moving the wrong way. A large portion of the Fed’s overseas loans have recently been swapped back as markets around the world have recovered.
The Fed’s aggressive overseas lending has injected it into the world of foreign policy: Not every country gets equal access to the Fed’s dollars. Turkey, for example, has appealed unsuccessfully for dollar loans from the Fed to support its sinking currency, according to public comments made in April by the U.S. ambassador to Turkey, David Satterfield. A representative for the Turkish central bank didn’t respond to a request for comment.
Those decisions are based on creditworthiness, but political considerations could pose a threat to the Fed’s independence, said Mr. Sheets, the former Fed economist. When the Fed rolled out the lending program during the 2008 financial crisis, central-bank officials consulted with the leadership of the Treasury and State Department to make sure any operations were consistent with broader U.S. objectives, he said.
“The Fed was keenly aware of this tension that, yes, this was monetary policy, but it was abutting some broader issues that were not typically the Fed’s area,” said Mr. Sheets. Concerns that such lending programs could suck the Fed into broader foreign policy entanglements were a “meaningful constraint” on the expansion of the swap lines, he said.
The moves have also left the world ever more tied to a single country’s economic management and central bank. Efforts have persisted for years to dilute the dollar’s central role, via the euro, then the Chinese yuan. But knowing the Fed is willing to step in has led banks, businesses and investors to flock to the U.S. currency.
This gives the U.S. enormous power—to punish foreign banks for violations of U.S. sanctions, for instance, or to consider options like breaking the Hong Kong dollar’s peg to the dollar, something U.S. officials considered earlier in July, The Wall Street Journal reported, to punish China for its treatment of the city, before shelving the idea.
It also has produced a familiar cycle, said Stephen Jen, chief executive of Eurizon SLJ Capital Ltd. in London and a longtime currency analyst and money manager. Investors value the dollar for its safety. But every time there is a major market stress there is a run to the currency, leading to breakdowns in the market, which forces the Fed to step in, which reinforces investors’ faith in the dollar, he said. “People have become more dependent on the dollar than any other currency,” he added.
The Fed pioneered the current version of central-bank swap lines in 2007, when rising U.S. subprime-mortgage delinquencies jolted short-term debt markets and made it hard for big European banks to borrow dollars. Initially, the Fed lent to some European banks’ U.S. subsidiaries. It later rolled out swap lines to two foreign central banks, allowing the Fed to lend dollars with less risk, and expanded them to a dozen others over 2008 and 2009.
The Fed’s swap lines ‘may be the most important part of the international financial stability safety net that few have ever heard of,’ says Andrew Hauser, the Bank of England’s top markets official.
Photo: Simon Dawson/Bloomberg NewsThe Fed activated some of the swaps again in 2010 and 2011, as Eurozone debt problems mounted, and set up standing facilities with five major central banks in 2013. One Fed bank president formally objected, saying that the swaps effectively let European banks borrow at lower rates than U.S. banks and that they were an inappropriate incursion into fiscal policy.
When coronavirus shutdowns hit the U.S. and Europe in March, oil prices plunged and stocks plummeted. Companies drew down bank credit lines, socking away dollars to pay workers and bills as revenue vanished. Financial markets showed alarming signs of dollar demand.
Share Your Thoughts
Should the U.S. Fed be the world’s lender of last resort during crises like the coronavirus pandemic? Join the conversation below.
March 16, among the worst days in recent market history, brought the financial system to the brink. Stock prices plunged globally as investors scrambled to raise cash. Banks sharply increased the cost of lending dollars to each other. Foreign banks were forced to pay dearly, gumming up the flow of dollars to their customers.
In South Korea, big brokerages suddenly found themselves in need of large sums of dollars to meet margin calls, according to Tae Jong Ok, a Moody’s Investors Service analyst who covers financial institutions in the country. They had previously borrowed money to buy billions of dollars of derivatives tied to stocks in the U.S., Europe and Hong Kong. When those stocks plunged, lenders demanded they put up more cash. The scramble for dollars helped push the Korean won to its lowest level in a decade on March 19.
The scramble for dollars helped push the South Korean won to its lowest level in a decade; above, Seoul’s financial district.
Photo: SeongJoon Cho/Bloomberg NewsJapanese banks suffered, too. Many had made loans directly to U.S. borrowers. The sector also owned more than $100 billion of collateralized loan obligations—bonds backed by bundles of loans to low-rated U.S. companies—that in some cases had been bought on short-term credit and needed to be regularly refinanced. Insurers in Japan that had invested heavily in higher-yielding assets abroad also had difficulty securing dollars to fund their trades.
Indiscriminate selling
In Singapore, high borrowing costs affected the dollar supply to companies needing to pay off debt or import and export goods, according to bankers in the city-state. “There was a classic ‘dash for cash’ scenario,” said a representative of the Monetary Authority of Singapore, adding that dollar-market conditions became so strained there was indiscriminate asset-selling.
Central bankers from Singapore, South Korea, Australia and elsewhere swapped tales of the carnage on a regular call that included a representative of the Fed, according to people familiar with the calls.
As the crisis snowballed, the Fed increased purchases of Treasurys from $40 billion a day on March 16 to a record $75 billion days later. It also expanded the dollar swap lines to nine other countries. By March 31, the Fed had launched a new program that let some 170 central banks borrow dollars against their holdings of U.S. Treasurys.
The rollout was faster and broader than when the Fed tentatively introduced the swap lines during the financial crisis a decade earlier. Back then, “it was improvisation,” said Adam Tooze, a Columbia University history professor who writes about financial crises and war. “Today, it seems extremely deliberate.”
As financial markets recovered, dollar borrowing costs for many banks and companies outside the U.S. fell. The Fed’s outstanding currency swaps started receding in mid-June, as a wave of transactions matured and weren’t renewed, and fell further to $107.2 billion as of July 30.
The facility that lets central banks borrow against Treasury holdings hasn’t seen much use. Analysts said its presence alone helped stop the scramble for dollars.
While the Fed’s actions during the financial crisis sparked outrage—seen to be aiding firms that caused the crisis—there have been no concerns raised publicly by U.S. lawmakers or Fed officials about the Fed’s growing global role. “The whole pandemic is a different enemy,” said William Dudley, New York Fed president from 2009 to 2018. “The political support for the Fed to be aggressive is much broader this time.”
Mr. Powell testifies before the House Financial Services Committee on June 30.
Photo: tasos katopodis/Press PoolThe Fed has had little choice but to intervene, given the dollar’s global centrality. Some 88% of the $6.6 trillion in currency trades that take place on average daily involve dollars, according to the Bank for International Settlements, or BIS. The dollar is also the most commonly used currency in cross-border-trade in commodities and other goods.
In addition, low American bond yields over the past decade prompted many big investors to send dollars to emerging markets. By the end of 2019, the volume of U.S. dollar-denominated international debt securities and cross-border loans reached $22.6 trillion, up from $16.5 trillion a decade earlier, according to BIS data.
Discontent about the dollar’s growing dominance has percolated for years, including among U.S. allies. Mark Carney, the Bank of England’s governor at the time, took aim at the dollar’s “destabilizing” role last August in a keynote speech at an annual central-bankers gathering in Jackson Hole, Wyo.
He argued the dollar’s growing role in international trade was out of step with America’s declining share of global output and exposed developing countries to damage from changes in U.S. economic conditions. He also outlined a proposal for central banks to create their own reserve currency.
The Trump administration’s use of tariffs and sanctions has spurred more countries to seek trading arrangements that bypass the dollar, but the efforts have had little effect.
One irony of the U.S. financial crisis was that the dollar’s use overseas only increased in its aftermath. One reason was the Fed: Its liberal lending during the crisis convinced investors that whatever happened, their access to dollars was more or less assured.
A decade ago, Jonathan Kirshner, a Boston College political science and international studies professor, predicted a decline in the dollar’s international role.
Its performance has been more robust than he anticipated, he said in a recent interview: “In the absence of viable alternatives, the dollar endures as the most important currency for the world.”
Write to Serena Ng at serena.ng@wsj.com and Nick Timiraos at nick.timiraos@wsj.com
Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
"world" - Google News
August 03, 2020 at 11:51PM
https://ift.tt/2XnLRB7
Covid Supercharges Federal Reserve as Backup Lender to the World - The Wall Street Journal
"world" - Google News
https://ift.tt/3d80zBJ
https://ift.tt/2WkdbyX
Bagikan Berita Ini
0 Response to "Covid Supercharges Federal Reserve as Backup Lender to the World - The Wall Street Journal"
Post a Comment