Which Euro area bank needed Dollars from the US Federal Reserve?

by Shaun Richards

Today it is the turn of Europe to be in focus and let me briefly break my rule of looking at the real economy first because there is something going on which if it continues could easily hit it. As I seem to be not far off alone in noting this here is one of my own tweets from this morning.

There are two main things going on here. Firstly as I have pointed out before there is a shortage of US Dollars which tends to get worse as we approach year end. The tighter the situation is expected to be then the earlier people get ready and thus those considered more risky find it harder to get some.

Next comes the issue of the mechanics. This is an example of what have been called central bank FX swaps or liquidity swaps. Here is the ECB ( European Central Bank ) explainer.

Under normal circumstances, if a bank in the euro area needs US dollars, for example because it needs to provide a US dollar loan to a client, the bank turns to the market. But if US dollar funding costs are too high or if the market is disrupted, the bank can go to its national central bank. In this particular case, the ECB can get dollars thanks to the currency agreement with the Federal Reserve.

The next bit is both true and a maybe misleading.

Many of these currency agreements act mainly as a safety net and have never been activated.

According to the ECB website it can borrow up to US $80 billion from the US Federal Reserve. Actually I am not sure that is up to date but I would not worry about that too much as on a crisis the size would quickly be increased.

These are in existence in other areas for example there was a time that there were fears about the Irish banks and a need for UK Pounds back in the day.

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.

Such a line could be used post Brexit for example should UK banks need Euros or Euro area ones need pounds. But in essence and indeed the experience so far these swaps are for supply of the US Dollar as Aloe Blacc pointed out.

I need a dollar dollar, a dollar is what I need
Hey hey
Well I need a dollar dollar, a dollar is what I need
Hey hey
And I said I need dollar dollar, a dollar is what I need
And if I share with you my story would you share your dollar with me

Actually our Aloe made a decent fist of explaining why a swap line might be used,

Bad times are comin’ and I reap what I don’t sow
Hey hey
Well let me tell you somethin’ all that glitters ain’t gold
Hey hey
It’s been a long old trouble long old troublesome road
And I’m looking for somebody come and help me carry this load


The Economy

Whilst the banking sector seems to be rumbling on with the same signs of indigestion we have been observing over time there have been some better hints from the real economy. For example let me hand you over to the Italian statistics office.

In July 2019, estimates for both value and volume of retail sales saw a slight fall when compared with a
month earlier, as the value was down 0.5% and the volume decreased by 0.7%.

As you can see it starts badly but stay with me.

In the three months to July 2019 the retail trade index increased both in value and in volume terms,
growing by 0.5% when compared to the previous three months (Feb – Apr 2019).  Year-on-year both measures of retail trade showed growth for the second consecutive month: the value rose by 2.6%, while the quantity sold was up 2.8%.

The reason why I have noted this is because this area has been a struggle for Italy and because in Italy an annual rate of growth of 2.8% stands out like a sore thumb. Unfortunately Italy’s statisticians have posted the wrong chart ( value not volume) something which no-one else seems to have noted. But even so this looks like a better phase for retail sales than even in the Euro boom.

Maybe it was always there even in the GDP figures.

This result synthetizes inventories negative contribution and domestic demand positive one (-0.3 pp. and +0.3 pp. respectively).

Should inventories simply do nothing Italy will have some economic growth from its domestic impetus. Not a lot and there is manufacturing to consider but for Italy anything is a bonus. Oh and you may have spotted that there is another tick in the box for my argument that low inflation boosts economies via retail sales and real wages. Because with the volume and value figures so close there is very little or no inflation here.

Someone has not noticed this however.

ECB presidential nominee Christine Lagarde pledges to act with “agility” against what she describes as inflation that is persistently too low ( Bloomberg )

Another possible route comes from Germany where things are at least not getting that much worse.

In July 2019, production in industry was down by 0.6% on the previous month on a price, seasonally and calendar adjusted basis according to provisional data of the Federal Statistical Office (Destatis). In June 2019, the corrected figure shows an decrease of 1.1% (primary -1.5%) from May 2019………4.2% on the same month a year earlier (price and calendar adjusted).


If we start with the Euro area economy then as I pointed out last week things are not as grim as some are saying, The money supply numbers have improved in 2019 and there are one or two flickers of action. However this morning has also brought a signal of trouble as China is not doing this for fun.


You may note that by acting to increase the money supply they are helping the banks first or behaving like us western capitalist imperialists.

Meanwhile I could type a fair bit about Euro area banks but instead let me show you the tweet of their share prices which speaks volumes. Share prices are far from always right as otherwise they would rarely move but look how long this has been going on.

Is this the real reason the ECB will act next week?