One of the defining characteristics of the 2011 crisis was dollar swaps. Almost all attention was paid to PIIGS and focus on the European banks holding their debt, as well as the very real possibility that all would break up the euro. Behind all that was the same dollar troubles as in 2008, and for the very same reasons. The offshore “dollar” market was once again under severe strain, so much so it convinced the majority of participants to get out of the business as best as possible (leaving, as noted yesterday, mostly the Japanese).
The original dollar swaps originating from the Fed to foreign official institutions, augmented during the 2008 crisis in both volume as well as the number of central banks participating, expired on February 1, 2010. That sunset provision says a lot about early recovery expectations. Policymakers all over the world really believed that things would go back to normal, meaning for dollars and dollar policies all the emergency measures like these swap lines were a one-time-only last resort.
Barely three months after that expiration, in May 2010 concurrent with Greece’s arrival in the mainstream (and the related liquidity flash-crash in stocks), they were brought back but once again on a temporary basis. As before, the events starting in 2010 and culminating in the winter of 2012 were thought to be transitory. It wasn’t until October 2013 that Fed dollar swap lines were made a permanent feature of the global landscape. It was not understood as defeat nor trumpeted as belatedly catching up to global monetary reality.
The highest volume was registered in December 2008 at just more than $580 billion, a truly astonishing sum that translates only a small part the scale and really scope of the global “dollar” issue. In February 2012, volume was at most just under $110 billion, which may propose some progress in that vast difference in scale between the funding strains 2008 to 2011. In other words, it may at first seem as if the Fed was successful in reducing the amplitude, but what was actually important was that there was recurrence at all, not the volume attained by it.
