Thursday, October 16, 2008

Achtung USA!

The ECB is now accepting all kinds of collateral for their U.S. dollar funding facilities. There is a non-zero risk that since the ECB's liabilities are denominated in foreign currency, they could engineer a default or engineer a massive depreciation of their own currency when the liabilities come due.

In other words, there is a danger that the U.S. will hold worthless Euros (as EU member countries revert back to national currencies) backed by substandard collateral.

This turn of events also invites fraud - the Euro banking system is basically getting cheap dollars that they have to pay back "someday". This invites national banks to give "sweetheart loans" (i.e., loans that do not have to be paid back) to their favored contacts. I don't think our politicians understand this risk.

15 October 2008 - Measures to further expand the collateral framework and enhance the provision of liquidity
The Governing Council of the European Central Bank (ECB) today decided, by means of a teleconference, on the following measures:

The list of assets eligible as collateral in Eurosystem credit operations will be expanded as set out below, with this expansion remaining into force until the end of 2009.

As from the operation settling on 30 October 2008 and until the end of the first quarter in 2009, the provision of longer-term refinancing by the Eurosystem will be enhanced as set out below.

The Eurosystem will start offering US dollar liquidity also through foreign exchange swaps.

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