The US Federal Reserve announced today that it would provide credit of $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore, the four large important economies in a new round of 'swap' arrangements after providing a $15 billion swap line to New Zealand on Tuesday and $30 billion to Australia last month.
Under the swap arrangement the Federal Reserve will accept other nation's currencies in exchange for the dollar till 30 April 2009 as most of the investors, not wanting to take any risk, have withdrawn their money from developing countries.
To avoid the foreign currency crisis from spreading to other nations the Fed is making sure that the fundamentally sound and well managed economies have ready access to the dollar as the fear of getting its money back from these well established central banks is negligible.
The Fed said in a release, 'These facilities, like those already established with other central banks, are designed to help improve liquidity conditions in global financial markets and to mitigate the spread of difficulties in obtaining US dollar funding in fundamentally sound and well managed economies.
The swap line arrangement by the Fed was previously made available only to developed nations, such as Japan, Canada and Britain, but in wake of the global financial turmoil it was then extended to Norway, Sweden, Switzerland, The European Central Bank and of late to Australia and New Zealand as all these countries have sound credit ratings.
The central bank of Mexico and the Reserve Bank of New Zealand said that although the credit facility gave them more flexibility and the option to use it was there but they did not require it for the present moment whereas Brazil would avail of the facility immediately
South Korea, which is in dire need of the dollar will use the credit line as its banks and companies are finding it difficult to secure enough dollars to service their debts and pay for business activities. Increased dollar demand has put downward pressure on the local currency, with the won losing around 34 per cent so far this year.
Brazil , one of the emerging nations and a major economy in Latin America, has been troubled by the crisis on its stock market and currency forcing the central bank to inject $7.7 billion into the domestic money market to counter the credit squeeze, and was standing by with nearly another $3 billion if necessary.
Last week it also intervened three times to sell an unspecified amount of dollars from its reserve pile of $207 billion to reverse the slide of its currency, the real which had fallen by 30 per cent.
Of all the countries in Latin America, Mexico, the second-biggest economy in that region is the most dependent on the US for its exports, investment and tourists. Mexico has sold $2.5 billion to boost the flagging peso, and was examining a 4.3-billion-dollar emergency stimulus plan to drive the country's flagging economy.
Although Singapore's banking system and foreign currency reserve at $150 billion is sound, the government decided to take precautionary measure by announcing to guarantee all local and foreign currency bank deposits.
Commentators feel that the swap line extended to Singapore is more symbolic than substantive as the country does not require the dollar swap facility.