Posted on 02/01/2009 5:52:44 PM PST by Golddigger3
SNIP
RECENTLY LATVIA, WHOSE central bank has bailed out the country's banking system, was the scene of demonstrations and populist rhetoric aimed at granting borrowers relief on loans from Swedish banks -- which have a big presence in the Baltic nation. If the Latvian government grants this relief, it would seriously hurt Swedish lenders, whose central bank has borrowed $25 billion from the Fed in these currency-swap lines.
"This is the kind of fiscal pressure that can easily rip the European Union apart, and cause the kind of civic upset that leads to revolution," says Sean Egan, co-founder of Egan-Jones, a credit-rating firm in Pennsylvania.
And some of the most stable countries are involved. Switzerland, whose banking system has assets valued at eight times the nation's annual economic output, is in hock to the Federal Reserve to the tune of $20 billion, a massive amount for a small country. Britain, with its highly leveraged financial system, has had to bail out its banks three times so far, yet must repay the Fed $54 billion.
These pressures are starting to affect sovereign borrowing, too: Germany recently auctioned 10-year government bonds -- but the government was left holding 32% of the offer, in what analysts regarded as a failed deal.
Economists Carmen Reinhart of the University of Maryland and Ken Rogoff of Harvard have studied sovereign defaults going back to the 14th century, and found that mass sovereign defaults tend to run in waves when currencies begin to melt down. Says Reinhart, "We've found that global banking crises cause the kind of turbulence that leads to sovereign defaults. It's just beginning."
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(Excerpt) Read more at 74.125.47.132 ...
Why would this surprise anyone? I believe the only country to date to pay the their debt for WWII was Great Britian.
I’m confused.
Why is the AMERICAN federal reserve bank loaning money to european banks??? Doesn’t the european union have it’s own reserve banking system???
$400 billion is chump change to the Fed.
Here’s more from the article to explain a little bit why we are doing it:
Some believe the Fed’s swaps to prop up Europe’s banks are a foolish bet.
“[Fed Chairman Ben] Bernanke’s assurances aside, I don’t see how they can easily be repaid,” warns Gerald O’Driscoll, senior fellow with the Cato Institute and formerly with Citigroup and the Dallas Fed.
Here is how the swaps work. The Fed and, say, the European Central Bank agree to exchange a set amount of each other’s currencies at a certain exchange rate for six months, with a provision to renew the terms at maturity. The ECB uses the money to help aid bank-bailout packages for countries like Belgium, Finland, Hungary and Ireland that have troubled dollar-based assets. (Asian central banks are also part of the program, but haven’t utilized it nearly as heavily.) The Fed gets a promise from the ECB to repay the debt in six months.
A big hitch: Europe’s commercial banks have more exposure to wounded emerging markets than U.S. counterparts. By one estimate, European banks provided three-quarters of the $4.7 trillion in cross-border loans to the Baltic countries, Eastern Europe, Latin America and emerging Asia. Their emerging-markets exposure exceeds that of U.S. lenders to Alt-A and subprime loans.
That doesn’t tell me WHY. It sounds to me like a sinking ship is trying to save a faster-sinking ship. Isn’t that pointless? Shouldn’t the sinking ship just worry about itself?
My gut says that when this is all over, somebody is going to lose really big, and somebody is going to win really big. Does this make sense?
If these countries can’t pay us back can we repossess them?
Yep.
L
$400 Billion is chump change for a government drunk on Obama love and eager to spend two or three TRILLION dollars that it does not have.
Our children and grandchildren have every right to arrest any surviving government officials when these ungodly bills come due and their taxes decimate their paychecks. This thieving bunch of politicians is stealing from future generations who never had a vote on whether they wanted to go into servitude for this corrupt government.
The Federal Reserve Bank made the loan, it isn’t the US taxpayers problem, it is the Fed’s.
The Fed loaned dollars to the foreign central banks in exchange for an equal amount of their currency.
We swapped equivalent amounts of currency. It's not like we have no collateral.
OK, here’s ‘the why’:
There are dollar-denominated assets held outside the US and the US banking system. Mortgage-backed securities, crap in SIV’s and other structure vehicles, etc. With me so far? Crappy paper, owned/held in banks overseas who don’t use the US dollar, but the instruments are valued in US dollars and issued here in the US.
There is no “global bank of last resort” to backstop this crap when it blows up on the balance sheet of a foreign bank. Let’s say some EU bank holds a bunch of crap US RMBS paper and now needs a lifeline as their asset package is downgraded and they have to cough up some more deposits or reserves to maintain their credit ratings, etc. Well, if the ECB tried to backstop this stuff, they first have to convert Euros to dollars (a moving target - perhaps moving a lot) and then backstop the problem.
So, the problem is “how do foreign central banks act as the ‘lender of last resort for $US assets without suffering a currency slip at the same time?”
The ‘solution’ is for the central banks to swap large chunks of each other’s currency. The ECB can then use $US to backstop assets in Euro banks held in dollars, and the Fed can use the Euros in the swap to do likewise for assets here held in Euros.
That’s the idea.
The implementation is clearly becoming a tad more tricky.
Exactly right. That’s why it doesn’t show up as a liability - in fact, it shows up on the Fed’s balance sheet as “Other Federal Reserve Assets” or some such.
Since this is a swap between central banks, there is (supposedly) no counterparty risk.
I forgot to mention that the outgoing swap to the ECB (or other bank) shows up as as liability.
The net:net effect is that the balance sheet hasn’t changed. It just got moved around.
((((PING))))
Thanks for posting.
I like all this swap stuff. I feel like I’m at a swap meet looking at some guys old toaster and socket wrenches. I’ll ask him if I can swap my old couch for what he’s got
There was a series of revolts in Venice, Genoa, the Low Countries and England over these same issues.
When talking about open revolts in the marginal states in Europe, the Warsaw Pact countries, and the Club Med countries, the question is no longer if we’ll see one, but how many will we see and when will we witness them.
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