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Monday, April 13, 2009

Buiter is back at it...

Prof Buiter from the LSE at his blog on the FT, opined on the sublte differences of the new swap arrangements by the FED, BOE, BOJ and the Swiss Central Bank, to be a little surprising.

In his reckoning, a swap is still a swap. I think so too.

Apparently, the major central banks--and not the non-central bank's instead-- will be borrowing foreign currency to support non central bank institutions, over the non-financials doing it for themselves or by request to the central bank's. Most likely the borrowing will help to finance public debt and increase government spending, or at least provide insurance for it.

I always thought they always did this. But, his major contention with this is that not only do the non financial bank's in the UK have heavy exposure to the US dollar, the risk of further losses is not yet determined.

The stand alone for the BOE is only $40 billion. By his estimation, this is quite a bit more than the exposure by the BOE, at least. It could be wiped out as Prof Buiter feels if it were used three months earlier and the risks, are still there.

I hope it works in stabilizing governments at this time. It appears as if no one knows where the first sign of recovery is going to show up.

But, it is a swap and, I would go further to say that it is more government borrowing--interest rate variables, even worse if it denominated in a SDR type fashion as the IMF uses, included.
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