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Thursday, October 30, 2008 2:06 AM


Fed Expands Swap-O-Rama to Brazil, Mexico, South Korea, Singapore


In an effort to unfreeze money markets the Fed Expands Swap-O-Rama to Brazil, Mexico, South Korea, Singapore.

The Federal Reserve agreed to provide $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore, expanding its effort to unfreeze money markets to emerging nations for the first time.

The Fed set up "liquidity swap facilities with the central banks of these four large systemically important economies" effective until April 30, the central bank said yesterday in a statement. The arrangements aim "to mitigate the spread of difficulties in obtaining U.S. dollar funding."

"The swap lines will help unclog the liquidity pipeline and that action is boosting markets even more than" the Fed's rate cut, said Venkatraman Anantha-Nageswaran, head of research at Bank Julius Baer & Co. in Singapore. "It's a step in the right direction and prevents things from getting worse."
Step Towards The Cliff

The idea that currency swaps are a step in the right direction is complete silliness. The Fed's swap-o-rama meet does not unclog anything. It just seems like it. The illusion will vanish as soon as the Fed stops the swap meet. Note the similarity between the Fed's actions and a drug dealer and his client. A shot of heroin will relieve the withdrawal symptoms, but only if the next dose is stronger.

Korean Stock Market Surges On Fed Supplied Drugs

For now the market is happy as South Korea Stocks Surge by Record.
South Korea's stock index rose by a record and the won surged after the central bank signed a $30 billion currency swap with the Federal Reserve and President Lee Myung Bak said he's ready to take more steps to aid the economy.

The swap line is part of the Federal Reserve's efforts to alleviate a credit freeze in emerging nations, with the U.S. also providing dollars to Singapore, Brazil and Mexico. Korean lawmakers today approved the government's $100 billion guarantee of bank debts to help lenders struggling to access foreign funds.

Korea's currency jumped 14 percent, the most in a decade, as policy makers' actions allayed concern the nation was headed for a repeat of 1997, when it needed an International Monetary Fund bailout to help repay offshore debt. The Fed's dollar provisions are part of increased global endeavors to thaw money markets, with Hong Kong and Taiwan lowering interest rates today following cuts yesterday by the U.S. and China.
Exit Strategy

The list of participants dependent on the Fed increases every day. The Fed is now the lender of only resort, not just to the US but to Brazil, Mexico, South Korea, and Singapore. When those loans are used up, what's next? More loans? Bigger loans?

I have a simple question:
Pray tell what is the exit strategy for this mess?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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