The cut in the interest rate on the Fed’s currency swaps with Europe has led to speculation that the Fed will have to cut its discount rate as well. I’m pretty sure that speculation is wrong.
The point is fairly simple: European banks will now be able to get one week dollar loans from the ECB at an interest rate of about 0.6 per cent. If a US bank needed to borrow dollars from the Fed and went to the discount window it would have to pay 0.75 per cent. That seems perverse.
Today’s co-ordinated action saw six of the world’s central banks agree to provide dollar funds a lot more cheaply. The European Central Bank, however, went a step further than its counterparts by lowering the margins, or haircuts, applied on the assets that borrowers hand over to the central bank in order to secure dollars.
This from the FT’s Robin Harding and Ralph Atkins:
In a further move to boost the attractiveness of its dollar offers, the ECB said it would value more favourably assets that have to be put up by banks as collateral to obtain US dollar liquidity. The current margin, or discount, applied would be cut from 20 per cent to 12 per cent.
That means that the ECB is not only willing to provide dollar funding more cheaply, but also take on more of the credit risk for doing so. This pretty much consigns the traditional way in which central banks have provided emergency funding to the dustbin.
But that may be no bad thing.
Yesterday, I included the Treasury chart below showing that the potential level of output is 13 per cent lower than that assumed by the same organisation in March 2008.
But the chart has been troubling me overnight because it is comparing apples with pears. The calculation methodology of GDP has changed since the 2008 Budget in a way which would have made the 2008 trend higher.
Just what the eurozone did not need right now: another possible German-Franco row, this time over jobs at the European Central Bank. In Brussels late on Tuesday, Wolfgang Schäuble, German finance minister, pressed for his deputy Jörg Asmussen to take over the ECB’s economics department from Jürgen Stark when he joins the ECB’s six-man executive board at the start of 2012.
The problem is that France’s Benoit Coeuré, an academic economist as well as French civil servant, who will arrive at the ECB at the same time as Mr Asmussen, is arguably much better suited for the economics portfolio.