Price Swapper

Last week the Fed and a bunch of central banks announced something that made the European markets and our markets go up a lot. Did they promise to bail out the Europeans?

The Fed didn’t promise a bail out and it didn’t add any risk. What they did was agree to lower the price they charge each other when they swap currencies. That’s not a bail out.

UBS is a Swiss bank. If it gets into trouble, it’s a Swiss problem. So it borrows from them. But if the Swiss National Bank needs dollars, it borrows them from the Fed by swapping dollars for Swiss Franks, promising to pay back the Dollars (in exchange for the Swissies) at a future date. In the interim, the Swiss National Bank has Dollars to lend, and the Fed has the Swissies as collateral.

There’s no real credit risk. If something happens to the Swiss National Bank, the Fed can exchange the Swissies somewhere. These swap lines existed before. The central banks just lowered the price they charge each other. They don’t bail anyone out. What it does is prevent a financial seize up and possible bank failure due to a lack of liquidity.

It’s as if the National Football League just agreed to increase the amount of revenue that all the teams would get from Super Bowl ads. It gives the impression of League solidarity, but It doesn’t improve the Indianapolis Colts’ record.

Still, standing together in the face of a challenge is good. It improves morale, and provides some positive news. But at the end of the day, Europe needs to find its own way out of its mess.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2014-09-09T17:13:43+00:00 December 5th, 2011|Global Market Update|0 Comments

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