Why four countries were selected for USD swapline with Fed?

I came across this amazing insightful paperfrom Joshua Aizenman and Gurnain Kaur Pasricha. Fed announced Swap liune with 4 emerging economies – S’pore, Mexico, Brazil and S.Korea in 2008. The event generated some research interest and a recent paperfrom Obstfeld et al showed they were merely used for signalling and are largely unutilised (JRV countersin his blog).

This paper from Aizenman explore why only 4 emerging economies were selected? Most emerging economies were/are facing stress but only 4 have got the Fed help.

We find that exposure of US banks to EMs is the most important selection criterion for explaining the “selected four” swap-lines.This result is consistent with the outlined model, where we show that in circumstances of unanticipated deleveraging, emergency swap-lines may prevent or mitigate costly liquidation today, allowing investment projects to reach maturity and providing positive option value to both the source and the recipient countries.

(Emphasis is mine). There is no charity work here. US didn’t help because these economies needed USD funding the most but because US Banks had max exposure in these economies. How did it help fin markets?

The FED swap-lines had relatively large short-run impact on the exchange rates of the selected EMs, but much smaller effect on the spreads (measured relative to that of other EMs that were not the recipients of swap-lines). Specifically, non-swap countries saw an average depreciation of 0.15% on the day after swap announcement, but swap countries saw their exchange rate appreciate on average, by about 4%. Yet, all the swap countries saw their exchange rate subsequently depreciate to a level lower than pre-swap rate, calling into question the long-run impact of the arrangements.

The summary offers food for thought:

This paper studied the unprecedented provision of swaps lines by the FED to four emerging markets. The evidence suggests selectivity criteria where EMs with large US banks exposure, sizable US trade exposure, capital account openness and solid credit history are prime targets of swap-lines. These results are in line with the view that it’s in the self interest of source countries to engage in bilateral credit arrangements with EMs as long as they have had a strong track-record in good times. Countries with lukewarm economic track-record in good times would find that the International Financial Institutions may be the main possible sources of help in bad times. This is also consistent with the recent willingness of key OECD countries to expand rapidly the size and the role of the IMF, and with the lukewarm attitude of Germany and other countries in the core of Europe towards the provision of  deep swaps-lines to Eastern European countries.

Very interesting. Toe to the US or else you have had it.

Mythili Bhushnurmath of ET reflects on implications for India:

What does all this mean for countries like India? Though the NBER paper does not say so, a reading between the lines makes it clear: countries that do not toe the US line or are not geo-politically important for the US are likely to discover that international financial institutions like the IMF, rather than the US Fed, will remain their main source of help in bad times.

But don’t we know that already? For all the talk of ‘reforming the mandates, scope and governance of multilateral institutions like the IMF to reflect changes in the world economy’ in the recent G20 Leaders’ Statement and the IMF’s new flexible credit line, ultimately it is geo-politics that rules. All the more reason for us to work on truly reforming the IMF!

I had earlier pointed that  US helped S Korea in 1997-98 crisis because US had special security relationship with S.Korea.  Infact, similar questions were raised by Kim Khiwan who in his speech explained the reason for US intervention in 1997-98. He also asked whether US would help any other country if there was no security relationship? This time it is US Banks exposure that led to the intervention. Is it another case of financial oligarchy? Or extending Meltzer’s words, is it because Fed simply did what US Treasury (which could be pushed by US Banks in turn) told it to?

Superb research.

4 Responses to “Why four countries were selected for USD swapline with Fed?”

  1. Canadian Pharmacy Blogg Says:

    […] Why four countries were selected for USD swapline with Fed … […]

  2. Ankit Sharda Says:

    Point taken. US helps only those who are strategically important for her. But what is so earth shattering about that. After all, US is not a charity institution whose prime responsibility is to bail out the world in times of crisis.
    Hence, the argument for reforming the governance of multilateral institutions like – IMF, World Bank, etc. assumes immense significance for EMs and they should leave no stone unturned in ensuring that they have a greater say in the affairs of these institutions.
    From EMs perspective, efforts to woo US can take a back-seat for the time being!!

  3. Tirath Says:

    S’pore – Fin Institutions and Temasek / GIC
    Brazil – Commodities esp. ethanol
    S. Korea – Proximity to China, N.Korea + Trade
    Mexico – Immgration + Trade
    Do correct me, someone, if I may be wrong.

  4. IMF credit line for Colombia, Poland and Mexico « Mostly Economics Says:

    […] will be a good topic of research in  signalling and international economics. We have just seen a fantastic paperwhich suggests Fed swapline was to help US banks and not necessarily because the countries faced USD […]

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