(Mint Press) – In the absence of the International Monetary Fund (IMF), the U.S. Federal Reserve System, or the Fed, has been injecting hundreds of billions of dollars into the treasuries of foreign governments over the last year in an attempt to liquefy assets in these countries.
In light of the IMF lacking the capital reserves or political will to intervene on the behalf of the countries currently struggling under major debt from the fiscal collapse of 2008, the Fed has taken on a guardian role toward mitigating the global response to the Wall Street crash. Concerns, including current negotiations to help bail out Egypt and previous loans to eurozone nations, have made the IMF less than eager to engage in a massive liquidity project that, at its peak last December, cost the United States nearly $600 billion.
The IMF is an international organization charged with the stabilization of currency exchange rates, which it does by temporary lending money to nations with a payment imbalance or by providing capital to secure the financial stability and economic growth to its client nations. Currently, the largest borrowers of the fund are Greece, Portugal, Ireland, Romania and the Ukraine.
In 2012, the IMF disbursed approximately $16 billion to member nations and was repaid about $13 billion.
At a time when many of these foreign banks are on the verge of collapse, the Fed linked its balance sheet directly to these banks. Foreign central banks used the injected money to bail out financial institutions in their countries. According to the Fed’s March 7, 2013 H.4.1 Statistical Release, this amounts to $314 billion currently paid out under the foreign exchange programs.
Should the bailed-out banks not be able to repay the loans, the foreign central bank is still obligated to the Fed. Actions to resolve this — raising taxes, cutting spending or selling debt — could cause a relapse that threatens to exacerbate the austerity crisis in Europe. The only other available remedy to the bailed-out bank would be to default, which would result in a loss of American capital.
The Fed issued the injected capital by means of a currency swap, in which the Fed purchased an amount of a foreign currency for its equivalent in American dollars. To shield against the natural fluctuations of currency exchange, the loan — at the time the foreign bank chooses to buy back its currency — must be paid at the exchange rate at the time the original “swap” was made.
While these “swaps” were little discussed when they were originally made, that is not because the Fed hid them. They were clearly profiled on the Fed’s balance sheets as “central bank liquidity swaps” and the Fed even hosted a FAQ page about the transactions on its website. According to the FAQ page, the purpose of this program is to “improve liquidity conditions in U.S. and foreign financial markets by providing foreign central banks with the capacity to deliver U.S. dollar funding to institutions in their jurisdictions during times of market stress.”
It has been disclosed, as well, that the Fed also pumped billions into American Insurance Group (AIG) via a $85 billion emergency loan to meet short-term cash needs, which, in turn, $22.4 billion were paid out to foreign banking counterparties including Deutsche Bank, Deutsche Zentral-Genossenschaftsbank, the Royal Bank of Scotland and Calyon.
Paul Krugman, in his blog for the New York Times, argues, “I’m concerned about Europe. Actually, I’m concerned about the whole world — there are no safe havens from the global economic storm. But the situation in Europe worries me even more than the situation in America.”
The blocking of the eurozone issuing joint bonds by Germany blocks the European Central Bank’s ability to sell its debt and channel needed capital to heavily-indebted nations, such as Italy and Spain. Debt mutualization, as the issuing of joint debts will do throughout the eurozone, would relieve heavily indebted nations’ fiscal obligation while forcing stronger economies, such as Germany, to bear additional debt.
The swap program is not limited to the eurozone. The full list of participating banks include the Reserve Bank of Australia, Bank of Canada, Danmarks Nationalbank, Bank of England, Bank of Korea, Banco de Mexico, Reserve Bank of New Zealand, Norges Bank, Monetary Authority of Singapore, Sveriges Riksbank, and Swiss National Bank.