Swap Lines Keeps Friends Close

Planning for contingencies is smart, like buying insurance, creating backups, or running duplicate systems, like in an aircraft, sometimes even triplicate. When you really value something you protect it.

As an individual investor, you always have cash around, what we call dry powder, if you didn’t, in the event of a crisis, you would be forced to liquidate assets and that’s not good. Investors value liquidity as much as they do profit. And what could you value more as a financial behemoth than your ability to move money?

In the financial world demand is important, but without supply, without liquidity, you have nothing and you can get nothing. Stagnation in a market, kills the market.

This is why central banks that rely on business never stagnating, create SWAP Lines between each other But it requires a relatively complex relationship and a lot of money, so, it’s pretty much dedicated to your closest friends.

What Is A Swap Line?

A Swap line is an agreement between two central banks that guarantees the flow of credit to businesses and households between the two countries represented by the central bank. It’s basically a life line, in the form of a pile of cash that each of the countries pony up and put in reserve, just in case liquidity dries up. Swap lines ensure that credit, and currency exchange always happens without a single glitch, it greases the skids.

And since there are so few swap lines between the United States’ Federal Reserve and the central banks of other nations, those lines must be pretty darn valuable. The lines are seen as the measure of last resort. So, the country with which we have a bilateral swap line agreement is considered important, but there’s always one country that is more important than the other, and that is always the United States.

So, let’s be clear here, other countries would give their left nut, if they had such a thing, to have a bilateral agreement with the United States that established a swap line. And for that privilege, the United States wants something in return. Typically that agreement will guarantee that the foreign country will treat all US based businesses doing business in the foreign country as if it was their own child. So for example, if it were a huge auto manufacturer, or a miner of a strategic resource, the other country would NEVER nationalize that company or take over the mine, because the United States would cancel their swap line and leave the country hanging out in the wild with zero insurance, no liquidity.

Why Did the Fed Expand Their Swap Lines To More Countries?

Since the global crisis of 2008, which was largely created by our mistakes in lending to people with little or no credit, which led to all sorts of other bad practices, but I digress. Since 2008 we (The Federal Reserve of the United States) established swap lines with favored nations, and those include to this day, the Bank of Canada, the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank.

On March 19 of this year (2020) we added several more countries in temporary agreements (minimum of six months), that include the Reserve Bank of Australia, the Banco Central do Brasil, Danmarks Nationalbank (Denmark), the Bank of Korea, the Banco de Mexico, the Reserve Bank of New Zealand, the Norges Bank (Norway), the Monetary Authority of Singapore, and the Sveriges Riksbank (Sweden).

Existing swap lines from 2008 plus the new pandemic swap lines.

These swap lines are in response to the global Coronavirus pandemic, which has basically shut dow the world economies. We just want to ensure that there are enough representative nations, our MOST favored trading partners, are able to get back up and running as we turn the economies back on.

Are They Temporary or Permanent?

Let’s be clear, this is a big deal. These are complex arrangements and the United States wants huge commitments from countries that we extend this credit to. But, like most things like this, it all depends on just how loyal they are, in a world with growing tensions, especially between China and the United States. We want to make sure who we know are our friends.

So, I suspect that these swap lines, these umbilical chords, will be in place for as long as we consider these countries our closest allies.

From a resource investor’s point of view, this creates a very stark criteria-based list of companies that we should be willing to invest in, particularly with companies dealing with natural resources like gold, base metals, and other resources. This is pretty much it. Perhaps the most significant filter when selecting a company to invest in…swap line friendly, or not?

If you want to know the up to date status of the fed’s swap lines, click here.

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