Fed bazooka aimed at the eurozone: What, therefore, does the swap programme really amount to? From the US perspective, the Fed has potentially announced a further extension to QE, the amount of which is hard to predict, and may be hard to control. Like other liquidity operations, it is intended that this will be limited and temporary, but who can tell? From the ECB’s point of view, it involves yet more exposure to the risky eurozone banks, and thus ultimately to the questionable assets which they will offer in collateral. And it involves taking foreign exchange risk, since the ECB will have to repay the Fed in full when the swaps unwind, even if the euro has depreciated in the meantime.
In other words, when we fully unravel all of this, we find that the shareholders of the ECB, Germany prime among them, are once again taking on contingent risks which the private markets are no longer willing to accept, and this time the operation is being facilitated by a probable expansion in the Fed’s balance sheet, as well as in the ECB’s.
Once again, the central banks’ supposedly “unlimited” balance sheets are being used as the only way of keeping the lid on the crisis.