The Federal Reserve agreed to provide $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore, expanding its effort to unfreeze money markets to emerging nations for the first time.
The Fed set up “liquidity swap facilities with the central banks of these four large systemically important economies” effective until April 30, the central bank said yesterday in a statement. The arrangements aim “to mitigate the spread of difficulties in obtaining U.S. dollar funding.”
“The swap lines will help unclog the liquidity pipeline and that action is boosting markets even more than” the Fed’s rate cut, said Venkatraman Anantha-Nageswaran, head of research at Bank Julius Baer & Co. in Singapore. “It’s a step in the right direction and prevents things from getting worse.”
The Fed announcement coincided with a decision by the International Monetary Fund to almost double borrowing limits for emerging market countries while waiving demands for economic austerity measures.
The Fed and IMF actions “show international resolve to support strong performing emerging-market economies adversely impacted by the current financial market turbulence,” U.S. Treasury Secretary Henry Paulson said in a statement.
Emerging-market investors have created “massive demand for dollars and a reduction of liquidity in other currencies” by going back to investing in the U.S. currency, said David Spegel, head of emerging-market strategy at ING Financial Bank NV in New York.
The Fed swap lines “are designed to help restore liquidity so that a vicious negative spiral doesn’t occur,” he said.
“The Fed is there to support large emerging markets that have done their homework over the past several years like South Korea, Brazil, Singapore and Mexico,” said Alonso Cervera, a Latin America economist with Credit Suisse Group in New York. “These are large, relevant emerging countries that have followed responsible fiscal and monetary policies for the past several years and now are going through tough times.”
The Fed also created this week a $15 billion swap line with its New Zealand counterpart and removed limits this month on four existing swap lines, including one with the European Central Bank. The Fed set up a $10 billion arrangement with Australia’s central bank last month and then tripled it to $30 billion.
“The hoped-for result is that we don’t see the global financial crisis worsen still more,” said Lyle Gramley, a former Federal Reserve governor who is now senior economic adviser at Stanford Group Co. “The Fed is making dollars available to the central banks of these countries who are trying to meet the needs of their banking systems.”
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