Reciprocal Funding Line Agreement

Effective liquidity agreements complement other policy initiatives at European level, which also help to strengthen the euro`s global reputation and ensure that all its members contribute to its benefits. For example, the Eurosystem liquidity agreements and the stimulus package adopted by EU heads of state and government on 21 July reinforce each other. While liquidity arrangements stabilize euro financing conditions on international financial markets, fiscal measures taken at EU level are helping to counteract the risks of fragmentation across the euro area resulting from the diversity of national fiscal responses to the COVID 19 pandemic. It is important that the recovery plan marks a new step towards the creation of a secure European asset, a decisive step towards strengthening the euro`s role in global financial markets and creating a capital markets union in the euro area. Central bank swap lines keep the global financial system active by providing the credit it needs for day-to-day operations. Without this credit, grocery stores would not be able to pay truckers to provide food. Gas station owners would not be able to order new tanks to fill the tanks that go dry. Your employer would ask you to work without pay this week. The COVID 19 crisis is an example. At the beginning of the crisis, the situation in the dollar financing markets deteriorated rapidly. Increased risk aversion has prompted players around the world to try to increase their stocks of U.S. dollars.

The cost of short-term borrowing in U.S. dollars has also risen sharply for euro area players (see Chart 2). [6] In a concerted effort, the Federal Reserve, the ECB and four other major central banks[7] responded by improving the provision of liquidity in U.S. dollars through their U.S. dollar liquidity swap line agreements. [8] The cost of this swap facility was significantly lower than the tense market conditions of March. This ultimately improved the state of the market, which led to a significant reduction in the financing costs of the U.S. dollar. A foreign exchange swap between two central banks is a contractual agreement in which the lending central bank receives foreign currency against its own currency, with the promise to cancel the transaction on a predetermined date, adding the agreed interest charges to the borrowed currency. Swap-line agreements are usually established by central banks issuing large currencies. They guarantee reciprocal access to each central bank`s currency and are considered low-risk transactions. [2] Most of these agreements are currently not in use or are used in only one direction.

[3] Since 2009, China has signed bilateral currency exchange agreements with 32 counterparties. The stated intention of these swaps is to support trade and investment and to promote the international use of the renminbi.


Published on: 11 априла, 2021  -  Filed under: Некатегоризовано