Fisher Investments Editorial Staff
Currencies, Monetary Policy, Developed Markets

Euronomics

By, 01/20/2010

Story Highlights:

  • In another sign the global economic recovery is progressing, European banks are normalizing.
  • The Swiss National Bank announced it will end a program aimed at supplying Swiss francs via currency swaps to the ECB and central banks of Poland and Hungary.
  • The ECB also announced it will gradually wind down emergency measures created during the financial crisis.
  • Though central banks are starting to scale back lending programs, the amount of available cash is still elevated well above normal levels, paving the way for future economic growth.

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The financial crisis triggered aggressive and innovative central bank policy responses globally. In the US, we're familiar with the Fed's various emergency lending programs: the Commercial Paper Funding Facility, GSE debt purchases, TALF, and a bevy of other acronym-designated measures (TSLF, PDCF, and TSLFO, to name a few). Other central banks embarked on their own liquidity-easing measures to relieve stresses in their domestic markets. But in an increasingly global financial system, no country is an island (at least financially—we're talking to you Iceland). So a conglomeration of domestic-only solutions proved insufficient to heal global financial markets. To ease financial stresses internationally, a number of central banks engaged in currency swap agreements to address strains worldwide.

Historically, central banks lent only to domestic banks in their home currencies. But banks today obtain and provide financing in virtually any currency (save those like the Chinese yuan, where strict capital controls limit currency availability). But the financial crisis disrupted interbank money markets—a major source of foreign currency funding. Soaring demand for "safer" currencies, like US dollars and Swiss francs, led to a shortage of those currencies overseas. To meet demand and prevent credit markets from freezing completely, the Fed and the Swiss National Bank lent US dollars and Swiss francs to other central banks so they could make loans in those currencies to their domestic banks.

In Europe, the low interest rate Swiss franc was already commonly used in Austria and in Central and Eastern Europe for mortgages and other debt. During the financial storm, banks suffered heavy losses as borrowers in these regions began defaulting and the franc soared versus other currencies. Now, declining demand for Swiss franc liquidity has prompted the Swiss National Bank to announce the swap program will end, with the last swap taking place January 25th.

The ECB also announced it will gradually wind down emergency measures created during the financial crisis. Interbank funding rates in the European banking system have significantly eased over the past year, indicating improving liquidity and recovering interbank markets.

Don't mistake the elimination of obsolete emergency liquidity measures for meaningful monetary tightening. Though central banks are starting to scale back lending programs, the amount of available cash is still elevated well above normal levels, greasing global economic wheels and paving the way for future economic growth. At this juncture in the global recovery, focus is rightly on maintaining sufficient liquidity to support growth rather than fretting over potential inflation. Plus, the winding down of liquidity programs globally shows central banks are keenly aware of the potential for inflation to rear its head down the road. For now, normalizing euro banks are positive signs central banks' liquidity-easing efforts were effective.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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