GO
Loading...

Bank of England Swap Line: Slicing & Dicing the PIIGS

The Bank of England and the European Central Bank announced a new swap line agreement today. But Portugal, Greece, and Spain need not apply—it only benefits the Emerald Isle.

Specifically, the BoE/ECB agreement creates a facility for providing Ireland with up £10 billion in sterling liquidity, should the need arise.

A swap line is a mechanism for central banks to exchange currency.

The technical name—a central bank liquidity swap—makes the concept sound more difficult than it is. The idea is pretty straightforward: Two central banks agree to exchange a fixed amount of currency, while simultaneously arranging a future date to swap the currencies back, effectively unwinding the position. The central bank on the receiving end can then inject the foreign currency into its own economy. This is useful, because private firms often have payables in foreign currencies. (In this example, firms in Ireland may owe payments in British pounds.) You can read more about swap lines on The Federal Reserve Bank of Atlanta's blog.

The Bank of England released the news in a very short—62 word—announcement on its website, quoted in full below:

"The Bank of England and European Central Bank (ECB) are today announcing a temporary reciprocal swap agreement (swap line). This precautionary measure would enable the ECB to provide sterling liquidity to its counterparties. If requested, the Bank of England will provide the ECB with sterling in exchange for euro up to a limit of £10bn. The agreement expires on 30th September 2011."

Curiously, the BoE does not mention Ireland by name—nor is there any reference to the restriction of funds by nation. The statement above merely references "counterparties".

The relatively verbose 104 word announcement from the European bank reads, in its entirety, as follow:

"Within the framework of central bank cooperation, the European Central Bank (ECB) and the Bank of England are today announcing a temporary liquidity swap facility, under which the Bank of England could provide, if necessary, up to GBP 10 billion to the ECB in exchange for euro. The agreement expires at the end of September 2011.

The agreement allows pounds sterling to be made available to the Central Bank of Ireland as a precautionary measure, for the purpose of meeting any temporary liquidity needs of the banking system in that currency. The related announcement by the Bank of England is available at: http://www.bankofengland.co.uk."

The ECB statement specifically references the Central Bank of Ireland as the potential recipient of the swap.

What inferences—if any—can be drawn from the distinctions in language are debatable.

However, this much we know. (Or, more cautiously stated, this much we've been told.)

Britain will not be bailing out the broader EU.

________________________________________________

Questions? Comments? Email us atNetNet@cnbc.com

Follow NetNet on Twitter @ twitter.com/CNBCnetnet

Facebook us @ www.facebook.com/NetNetCNBC

NetNet TV

Wall Street