My Diary 464 --- Market Thoughts :IMF SLF & Fed Swap to Emerging

Market Thoughts -- IMF SLF & Fed Swap to Emerging Markets

 

October 30, 2008

 

KOSPI + 12.4%, HIS + 10.11%, STRAITS TIMES +6.96% as I wrote…I think the overnight IMF liquidity financing and Fed open swap to several emerging markets were the key driver to this surge.

Here are some of my digest for your reference

l         The IMF announced a new facility providing 3m funding for up to 5X a country’s quota for countries whose macro economic position is in their judgment sound.

l         Unlike traditional loans, there will be neither standard conditionality nor trenching for countries that qualify. The IMF has about US$250 billion available for lending (including special arrangements).

l         The magnitude of the funds is significant, though it may not cover the total financing requirements of the countries that may be eligible (Mexico, Brazil, Korea, Chile, Israel).

l         A side note is the eligibility criteria remain somewhat vague and lack clearly defined measures.

l         Meanwhile, the Fed has made $30 bn swap lines available to each Mexico, Brazil, Korea and Singapore, through April 30, 2009.

l         Other swap lines with the ECB or the PBoC may be forthcoming.

l         The funding will most likely ease the currency and short-term rates pressures seen in eligible countries.

However, I think by its very nature, the program does not address two additional pressures in these emerging markets:

l         The uncertainties about losses in corporations from derivatives/market speculation that have plagued firms in Mexico, Brazil, Korea and Indonesia.

l         The continued process of deleveraging by global banks and investors, which still requires not just liquidity but capital.

Background Information:

IMF SLF

The IMF's Executive Board approved today the creation of the Short-Term Liquidity Facility (SLF) to establish a "quick-disbursing financing for countries with strong economic policies that are facing temporary liquidity problems in the global capital markets."

http://www.imf.org/external/np/sec/pr/2008/pr08262.htm

According to the press release the purpose of the facility is to establish a vehicle for large, upfront, quick-disbursing short-term financing to be provided to countries with strong policies and a good track record but which are facing temporary liquidity problems arising from developments in external capital markets.

The key difference with respect to the traditional stand-by arrangement (SBA) programs is that financing is made available without the standard phasing, monitoring, and other conditionality drafted and monitored throughout the length of the program. The SLF will use conditionality, but only as a prequalification for access to the facility. It is this strong emphasis on past performance that makes the SLF a facility meant for countries that are facing short-term liquidity pressures despite strong initial macroeconomic positions and policies.

Fed Open Swap

http://www.federalreserve.gov/newsevents/press/monetary/20081029b.htm

Meanwhile, the Federal Reserve authorized the establishment of temporary liquidity swap lines with the central banks of Brazil, Mexico, Korea and Singapore. These new facilities will support the provision of U.S. dollar liquidity in amounts of up to $30 billion each, and have been authorized through April 30, 2009.

The FOMC previously authorized temporary reciprocal currency arrangements with ten other central banks in Australia, New Zealand, Canada, Europe, and Japan.