The risks and returns of ever-expanding swap and repo lines

Major central banks have significantly beefed up their liquidity support for foreign counterparties using their currencies during the past few years, as geopolitical strife and burgeoning fiscal debt makes potential capital market liquidity squeezes in key markets more likely and alternative currencies more attractive. Two main instruments are being adopted – swap lines and repurchase agreement facilities.

Swap lines allow central banks to exchange currency without having to post collateral. The Federal Reserve, for example, can hand the European Central Bank dollars and take euros at the current exchange rate, with a promise to reverse the trade at the same rate on a set date, plus interest. The ECB then disperses these dollars to banks under its jurisdiction and bears the credit risk itself. A repo line, meanwhile, requires the borrowing central bank to pledge collateral to obtain liquidity. This collateral almost always takes the form of the lending central bank’s government bonds – the Fed takes Treasuries; the ECB, eurozone government bonds, and so on.

Data from Central Banking’s Reserve Management Benchmarks shows that new swap lines between central banks remain rare.

In each of the 2022 and 2023 benchmarks, only one central bank said it had secured a new swap line in the preceding 12 months: an upper-middle-income central bank with a dollar line in 2022, and a different upper-middle-income South American central bank with a renminbi line in 2023. Expanding existing lines was more common, with five central banks reporting expansions in each year. In 2023, a low-income and an upper-middle-income African central bank expanded dollar lines, an upper-middle-income European central bank expanded a euro line, a high-income European central bank expanded a renminbi line, and the South American central bank that secured a new renminbi line also expanded an existing one.

In 2024, the number of new swap lines increased again: this time, central banks in Central and Latin America opened or expanded dollar lines, as well as two African countries and a Middle Eastern central bank opening lines with the Fed.

By 2025, the trend slowed down. Most central banks did not report changes to their swap lines in dollar, renminbi or euro. Two said they expanded their lines with the Fed – one high-income country in Europe and one high-income country in the Americas. Separately, this was also the year that Costa Rica secured a flexible credit line for $1.5 billion from the IMF; although Colombia lost its $8.4 billion precautionary line after the IMF suspended access due to widening fiscal deficits and rising public debt.

Overall, the picture is clear: while central banks are broadly increasing their reserves, they are also creating new swap and repo lines among themselves. While these tools have primarily been thought of as last-resort avenues for maintaining domestic financial stability, their role is evolving in the face of geopolitical strife and pockets of instability in the financial system, with the evolution of major central banks’ facilities, such as those of the ECB and the People’s Bank of China (PBoC).

Saleem Bahaj, a professor of economics at University College London , tells Central Banking that there are three major reasons for extending swap lines.

Overall, the picture is clear: while central banks are broadly increasing their reserves, they are also creating new swap and repo lines among themselves

First, as a monetary policy tool, as a swap line caps the cost of synthetically borrowing in the lending central bank’s currency. If the lender is the Fed, it means the cost of borrowing euros and swapping into dollars is effectively capped by the swap line rate, Bahaj explains, noting that the idea is that by doing so, banks don’t have to fire-sale their assets in dollars.

This mechanism has encouraged European banks to hold US dollar assets. When the Fed made it easier to access its swap line, European banks began holding more dollar-denominated debt, according to Bahaj’s research with Ricardo Reis. It also boosts the share prices of those banks, he adds.

The second reason is for a central bank to embed its currency in foreign exchange markets, particularly for foreign trade. This was an implicit goal of the PBoC in the 2010s and the ECB more recently with its expansion of Eurep. In their paper published earlier this year, Bahaj and Reis found that, between 2009 and 2018, if a country signed a swap line with the PBoC, the probability that country would use the renminbi for trade settlement rose by 12%. The logic is that the PBoC lends out renminbi to a partner central bank, which then provides the currency to commercial banks, which then use it to settle trade.

“These lines were also used for bailouts in some cases. ‘Has it turned the renminbi into an international currency?’ That depends on the definition of an international currency. Right now, it’s a trading currency,” Bahaj says, noting that from a geopolitical perspective, the threat came from Washington: by having to rely on the dollar, Beijing becomes exposed to financial stability problems in the US, so the motive to develop renminbi is explained by the scars left by 2008 financial crisis, as well rising geopolitical risk.

A third reason is that swap lines can be used as a substitute for reserves, Bahaj says. While there have only been a few examples of this recently – Bahaj recalls Association of Southeast Asian Nation swap arrangements as part of the Chiang Mai Initiative. The Asian swaps are structurally seen as liquidity lines with the goal of helping stabilise exchange rates. Another example is the arrangement between the ECB and the National Bank of Denmark: the krone is pegged to the euro, but, for example, if there was a speculative attack on Denmark’s currency, the ECB could step in, provide euros, and allow the Danish central bank to defend its currency, Bahaj says.

“Another clear example of this is what happened in the autumn with Argentina,” he adds, referring to the US Treasury’s provision of dollars to the south American nation, which has raised renewed concerns about the politicisation of swaps, particularly those offered by the US Treasury rather than the Federal Reserve.

One high-income central bank from Europe tells Central Banking that it considers swap lines an “important complement to its foreign exchange reserves”.

“They increase access to liquidity under stressed market conditions and can strengthen confidence even if never drawn upon. We have only drawn on our liquidity lines for testing purposes, but we believe they are important in maintaining diversified sources of foreign currency liquidity. For this reason, we are also participating in the new Eurep programme, and we expect operational testing to be performed for that facility as well to ensure readiness,” the reserve manager says.

This central bank also increased its dollar swap line allowance, which the official says, “reflected a broader effort to strengthen access to liquidity through such facilities”. They note this involved expanding access under an existing arrangement rather than establishing a new facility.

Politicisation of swap lines

The US Treasury’s intervention in favour of the Argentine peso in October 2025 at the time of elections in the country, buying an undisclosed amount of the Argentine currency, highlights the potential politicisation of bilateral currency arrangements. The Treasury – notably, not the Fed – ‘finalised’ a $20 billion swap line agreement with Argentina, financed through the Treasury Department’s Exchange Stabilization Fund (ESF).

Robert McCauley, a former senior adviser of the Bank for International Settlement’s (BIS) monetary and economic department, and a researcher of international financial markets, the international monetary system and corporate finance, tells Central Banking that it was not financial stability, but politics that drove the US Treasury to take on extraordinary risk by saying ‘yes’ to the Argentine call for support.

“I can’t remember the US Treasury ever selling dollars and buying an emerging market currency outright,” McCauley says. “Normally, that risk would have been borne by the borrowing central bank. This year, the New York Fed duly reported that it had bought pesos as agent for the Treasury’s account last fall – but did not say how many or at what price – and sold them all by end-year. Treasury secretary [Scott] Bessent claimed a ‘home run’ after the [Argentine encumbent] government party won [the election] and the Treasury got its money back. Be that as it may, this was a case of extraordinarily risky politicisation of the Treasury’s foreign exchange operations,” he adds.

Maurice Obstfeld, senior fellow at the Peterson Institute for International Economics and a former chief economist at the International Monetary Fund, echoes McCauley’s sentiment. Obstfeld says the US intervention on behalf of Argentina ahead of an election “may be seen by others in Latin America as the US putting its thumb on the scale of the democratic process”.

“Do I expect to see more of that under this administration? Sure. If the occasion arises where a favoured political figure is in peril due to a shortage of dollar liquidity, then yes, the Treasury will ride to the rescue. I ultimately think that doing so is not a great look for the Treasury or for the dollar system,” he adds.

Bahaj points out that while the Argentine case was political, it was not unprecedented: Mexico was supported using similar facilities in the 1980s. He also says that using the Argentinian request for access to the US Treasury’s ESF was “perhaps less about central banking and more about geopolitics”. Indeed, the ESF was itself borne out of geopolitical considerations, as a paper published last year by Juan Flores Zendejas and Gianandrea Nodari explored.

The authors point out that during the 1930s, the global economy disintegrated into currency and trade blocs, with the situation further worsened by competitive devaluations and protectionist trade policies. Within these regional networks, the hegemonic powers sought to stabilise exchange rates and promote trade while insulating themselves from external shocks. The ESF was created just two years after its British equivalent, the Exchange Equalisation Account, was set up and its lending activities were primarily driven by geopolitical considerations.

Zendejas and Nodari find parallels between the interwar period and the current geopolitical moment. They point out that Latin American countries at that time could not access BIS loans. While they sought help from the British-led sterling bloc, US president Franklin D Roosevelt saw the value in counterbalancing British power in the region, compelling the later architects of Bretton Woods, Harry Dexter White and Henry Morgenthau, to suggest the creation of an ‘American dollar bloc’ with South American countries, excluding politically unfriendly Brazil and Argentina, but including China. The ESF was part of the toolkit that Washington would use to foster better relations with countries in the region.

The researchers point out that the ESF operated in secrecy, without congressional oversight, often in combination with financial support from the Export-Import Bank of Washington (renamed Export-Import Bank of the United States in 1968). It extended currency swaps, and the recipient central bank would open an account on behalf of the New York Fed, acting as the US fiscal agent, and would receive an agreed interest rate – while the New York Fed processed the corresponding amount in US dollars at the prevailing New York exchange rate.

The ESF’s main recipient between 1934 and 1945 was Mexico, which received ESF support alongside trade and sovereign debt ‘agreements’ repeatedly, even when political tensions ran high between Washington and Mexico City over issues such as the nationalisation of the oil industry. The US also bought silver in 1938 to prop up Banxico’s reserves.

For other recipient central banks in the bloc, the US attached conditionality to the ESF loans, such as designing central banks to prioritise economic development in the region. Brazil and Cuba were encouraged to establish monetary authorities, with the latter seeing Harry Dexter White personally providing technical advice on monetary stabilisation and the removal of the dual-currency system that plagued the Cuban economy at the time.

Ecuador requested a $5 million loan in 1941 from the US, for which the Treasury saw “no economic justification” as the central bank held enough reserves, but the country argued that the loan would have symbolic importance to reassure domestic audiences – and it received the loan. Bolivia, despite also nationalising oil-related assets in 1937, was also offered $2 million to counterbalance the country’s growing ties with Japan, Germany and Argentina.

Soon after the recent Argentina episode, South Korea also asked for an ESF loan, Aditi Sahasrabuddhe, an assistant professor of political science and author of Bankers’ Trust: how social relations avert global financial crises, tells Central Banking. “There is definitely a status associated with having access to even an ESF these days. It somewhat resembles ESF loans of the past, and there is definitely a regionality to it. Mexico, for example, signed an ESF during a crisis because of their heavy integration with the US economy, as its own resources were depleted. whereas the UAE and, to a lesser extent, Argentina (which had also depleted much of its reserves), represented a friendship, and broader foreign policy interests,” she explains.

One country that did not receive US liquidity support despite strong political ties was Hungary. Amidst a heated political campaign last November, former prime minister Viktor Orbán told his followers that the country would receive a “financial shield” following discussions between him and US president Donald Trump. The Hungarians never elaborated on the supposed arrangement, which Trump himself denied offering just a few weeks later.

“The Hungarian case makes no sense to me at all. Argentina has its own currency, which tends to fall apart – it’s part-dollarised thanks to the populace holding a large amount of assets, both on- and offshore in dollars. The UAE is a dollarised economy because it has a hard peg. Hungary is nothing of the kind. Maybe the assumption was that if Orbán had done something to try to steal the election, and maybe if the EU response to that had taken a financial form, then maybe the US could have been there to save him from the [European] Commission and the ECB,” Karthik Sankaran, a senior research fellow in geoeconomics in the Global South program at the Quincy Institute for Responsible Statecraft, tells Central Banking.

“Treasury swaps have not been used since 2002; the last case was Uruguay, which was a systemically important country in the context of the regional issues at the time. The swap is better seen as a bridge loan until the country and the IMF can agree on a programme. That seems very different to me from promising a swap line and intervening in a local currency market to prop up a political ally just prior to an election,” Obstfeld says.

“The Treasury’s support for Argentina last year took politics to a whole another level. The Argentine peso suffered from the government party’s defeat in provincial elections in the approach to midterm national elections in late October. Weeks before this election, the Treasury agreed a $20 billion headline swap with the Argentine central bank, which borrowed $2.5 billion. In addition,  Bessent announced that the Treasury purchased pesos against dollars in the market. To top it off, president Trump told president [Javier] Milei – and Argentine voters – that US support would not continue if the election did not go the right way,” McCauley recalls.

“The end-July intervention in the yen is evidence that more exchange rate activism from the US Treasury may be in store,” Obstfeld adds.

All eyes on the Fed

While the Treasury can provide politicised liquidity lines without recourse, Fed swap lines exist to protect dollar financial stability on a global scale and are linked to the role of the US dollar in trade and capital markets. They are, however, relics of the 1960s, when the Fed frequently had to relieve pressures on the dollar that were revived in response to the 2008 global financial crisis (GFC) and made permanent in 2013. They allow for unlimited currency swaps between the Federal Reserve and five major central banks: the Bank of Canada; the Bank of England, the Bank of Japan; the ECB; and the Swiss National Bank (SNB).

McCauley recalls his argument from a 2024 paper, according to which swap lines are not just a financial stability tool: they are a monetary policy tool. Not only can they expand the Fed’s balance sheet, but they can also restore monetary policy transmission to the interest rates that matter to businesses and households, as they did in 2008 and 2020.

He argues that the Fed’s choice of swap partners is explained by the fact that the ‘big five’ oversee the currencies that sit on the other side of most dollar swaps, some five-sixths of the non-dollar turnover. McCauley’s paper from 2024 traces the history of swap lines, which emerged in response to ‘window-dressing’ practices in 1960s that would cause rates to spike. Today, the Fed’s swap lines backstop banks headquartered outside the US, which hold some $13 trillion in dollar-denominated debt and had no access to the Fed’s discount window. Topping this, actors in the FX swap market turned over some $3.5 trillion a day back in April 2022, and the US dollar appears on one side of about 90% of all FX swaps.

In the 1960s, The New York Fed’s FX desk set up a swap with the BIS to funnel dollars into the market, and BIS dealers would use dollars swapped in to make uncollateralised deposits in European banks, mostly in London. The BIS also swapped dollars with the SNB, which acquired dollars from domestic banks as ‘window dressing’ to show shareholders their holdings in francs, not dollars, McCauley says.

You have a whole range of things in the US that were once seen as reasonably cut off from parliamentary oversight because they represented an arena of agency expertise. A vast chunk of that no longer exists

Karthik Sankaran, Quincy Institute for Responsible Statecraft

The tradition of propping up the eurodollar market continued until the end of the 20^th century, he argues, which evolved into both an international extension of the discount window and an effort to restore the link between the Fed’s policy rate and the London interbank offered rate (Libor), elevating the Fed to a fully-fledged international lender of last resort. In 2008, it required repeated increases of the swap arrangements, and a move to make them unlimited, to close the yawning gap – at times close to 5% – between the three-month overnight index swap (OIS) rate and the Libor rate. At the peak of the programme, the Fed swapped almost $600 billion, mostly with the ECB, the BoJ, the BoE and the SNB.

The playbook of closing the gap between the Fed’s policy rate and Libor was once again dusted off in 2020, the paper recalls. Cutting the swap interest rate from OIS+50bp to OIS+25bp to the ‘big five’, alongside extending 84-day swaps, was not enough to rein in Libor, so the Fed extended swap arrangements to nine more central banks on March 19, and began conducting daily operations on March 23. The gap closed to “within 25bp” of OIS by early May, McCauley’s research recalls. The Quincy Institute’s Sankaran says he is concerned over the Fed’s autonomy following the overturning of the Chevron Doctrine. This principle had, until 2024, allowed specialist government agencies to have leeway in interpreting the specific applications of ambiguous legislation. The overturning contained a carve-out for the Fed’s monetary policy, but not for regulation, and the question of whether a swap line is considered monetary policy is an open one: arguably it would be in terms of potential monetary implications, but it is not strictly so, Sankaran says.

“You have a whole range of things in the US that were once seen as reasonably cut off from parliamentary oversight because they represented an arena of agency expertise. A vast chunk of that no longer exists. You could have questions about issues that should be perfectly clear to the right people: should one cut [the New York Fed’s foreign and international monetary authorities] Fima [repo facility] off to China? Absolutely not. That’s the dumbest thing you could do. But it could now come up as a possibility,” he adds.

“People are talking about the [overturning] in terms of regulations – that the Fed’s regulatory authority has much less autonomy than it had before Chevron was overturned. This poses a lot of questions with regards to stress tests, too. The carve-out for monetary policy in and of itself was kind of ludicrous. It did not make much legal sense. The overturning poses a lot of political issues for the Fed,” Sankaran says.

Obstfeld says the Fed should have sole discretion over who gets its swap lines, and only when it deems the decisions to be consistent with its mandate of price stability and full employment. “I think there is a risk that the Fed gets drawn into political situations and, as a result, its independence comes under a greater attack, whereas it should be the Treasury taking the lead on these issues. If the Fed takes over the role of the ESF, and it is forced to intervene on behalf of countries that the administration designates as being important, that becomes a fiscal policy decision, which the Fed should be insulated from,” he says.

His concern is that the Treasury’s directives would be inconsistent with the Fed’s mandate. If this were the case, Congress could ask the Fed why it was not meeting its mandate, causing some “uncomfortable finger-pointing between the Fed and the Treasury” – and an unhappy Congress may decide to ‘clarify’ the Fed’s independence, or actually change its mandate, Obstfeld says.

Sahasrabuddhe points out that altering these lines, by either taking them away or shrinking them, could “cause new kinds of problems”, as they have become a key part of established financial architecture. “These standing lines have been consistently used, quite regularly, and central banks tap into them to make sure dollar liquidity is flowing constantly. If that tap is closed, that could start to cause all kinds of problems for financial systems that have become reliant on the system,” she says.

For now, Fed swaps remain in place, but McCauley says that market participants may not be convinced that the Fed chair, Kevin Warsh, is as committed to upholding these lines as his predecessors were.

“Note that at the last Federal Open Market Committee meeting under Powell in late April, there was a discussion around the table of doing a multi-year extension of the central bank swaps, which have been renewed annually. This reassuring move would not only have served policy continuity and financial stability. In addition, it would have drawn attention to the role of the FOMC in deciding on the swaps,” he recalls.

“Kevin Warsh’s confirmation hearing in the Senate last spring heightened fears over Fed independence in providing dollars under central bank swaps. Warsh seemed to judge that the Fed’s independence does not apply in areas affecting international finance,” McCauley adds, noting however, that at a subsequent congressional testimony on July 14, the Fed’s chair clarified that swaps are independent monetary policy decisions.

“It’s worth underscoring that it is the FOMC that has the final say on the fate of swap lines, just as it controls the main instrument of monetary policy – the Fed funds rate,” McCauley says.

Kevin Warsh’s confirmation hearing in the Senate last spring heightened fears over Fed independence in providing dollars under central bank swaps. Warsh seemed to judge that the Fed’s independence does not apply in areas affecting international finance

Robert McCauley

Sahasrabuddhe points out that over time, the Fed recognised that it couldn’t give swaps to all countries outside the 13–14 major jurisdictions that are active in the dollar market spot. She adds that there is a “status politics” to being a provider and a recipient of swap lines. Her book explored how intra-personal relationships helped, or, at times, worsened global financial crises. As Mervyn King told attendees of the Central Banking summer meetings 2026, central banking is a “family affair”.

To address the need for dollars from other central banks, the Fed developed repo options, which are a “little more operationally costly”, Sahasrabuddhe says. Making dollar liquidity available was crucial during the 2020s ‘dash for cash’ episode, a possibility the Fed had discussed extensively in the 2010s, she says.

The Fima repo lines in 2020 were made easy to open because the Treasury and the Fed had been discussing options to prevent foreign central banks, particularly those with large FX reserves in East Asia, from selling Treasuries during a liquidity squeeze.

“The distinction between the ‘big five’ swap lines and the new repo lines is useful and, in a way, resembles the US system. There is no publicly available information on who uses Fima. It would be great for lower-middle and middle-income countries to access all liquidity when they need to. Instead, it seems like the biggest use case has been the SNB using it to finance the UBS-Credit Suisse acquisition,” Stephen Paduano, a postdoctoral research fellow at the University of Oxford and a former US Treasury official, tells Central Banking.

Distant cousins

For those outside the ‘elite six’ central banks with access to each other’s currencies on a standing and unlimited basis, asking for – and receiving – a swap line from the provider of the world’s de facto international currency can represent a friendship. Such was the case for the United Arab Emirates, which reportedly requested a swap line from the Fed earlier this year.

Sankaran says that he found the Central Bank of the UAE’s requests for a swap line “completely baffling”. For the US, it would be “functionally risk-free”, because it would involve lending dollars against a currency that is itself pegged to the dollar, with a currency board that has significant backing from the CBUAE’s assets.

“My theory is that it was never a financial stability issue. It was more about signalling, about wanting to be aligned more closely with the US at a time when Iran was supposedly charging vessels in renminbi for crossing the Strait of Hormuz. I think what the UAE was doing was almost entirely a signalling exercise rather than a function of financial stress. In the event of a catastrophic run on UAE banks because of geopolitical risk, would they have needed a dollar swap? I am sceptical,” he says.

UCL’s Bahaj echoes Sankaran’s sentiment. He points out that the CBUAE has a “gigantic quantity of FX reserves”, enough to keep the dollar-dirham peg “pretty much into the indefinite future”. The Gulf central bank wouldn’t have even had to sell its Treasuries initially, as it could have posted them against dollar liquidity with the Fed’s Fima repo facility. “The only motivation I can see for asking for a swap line is if the terms to accessing Fima, which aren’t public, are worse than the terms they could get from having a swap line,” he adds.

Swaps also tend to be slower to draw on. When Credit Suisse collapsed in March 2023, and the SNB alongside other Swiss authorities had to orchestrate the forced merger between CS and UBS, the Swiss central bank drew on Fima as opposed to its swap line because the former delivers funds almost immediately, whereas swaps have a T+1 settlement tenor. The advantage of a swap line is that it does not encumber reserves and is an open-ended backstop.

“What to make of the UAE’s bid for a US swap line? That the country is not lacking in dollars and [the fact it] could repo for $60 billion with the Fed are telling. The bid treats a dollar swap line as a loyalty programme reward,” McCauley says.

“The UAE made it very clear that it wanted a Federal Reserve swap line, similar to that of the ECB and other major advanced-economy central banks. That raises the question of whether the Fed’s facilities should be deployed for foreign policy objectives at all beyond the broad foreign policy objective of supporting financial stability and our allies’ economies, especially when those allies’ economies are closely linked to ours, and issues in those economies could have an impact on US domestic stability. This has been the criterion used until now for the swap lines that were introduced shortly before the GFC,” Obstfeld says.

I do think that if there is some constructive ambiguity around the future of the swap lines, it would convince Europeans to increase FX reserves

Saleem Bahaj, University College London

UCL’s Bahaj reiterates that swap lines are relics of the 1960s, when both sides wanted to swap currencies for FX interventions. For the Fed, for example, it makes little sense to hold euros – holding collateral while bearing exchange rate risk is less preferable than holding Treasuries. It also makes sense for US Treasury secretaries to encourage repo lines, as doing so boosts demand for Treasuries, he adds.

“Repo lines are the way forward here. I do think that if there is some constructive ambiguity around the future of the swap lines, it would convince Europeans to increase FX reserves,” Bahaj says, adding that there is the possibility that the Treasury “completely” changes to a coercive mindset by telling the Fed to switch the swap line to a repo one. Doing so is a “much lower line to walk” compared to threatening the invasion of Greenland, Bahaj adds. “I think if the Treasury secretary says the Fed needs to get rid of its swap lines, it is difficult for the Fed to resist that. It’s lending to foreigners. The legalities are murky. They can tell Fed officials to do repo instead – a compromise instead of a full cancellation.”

PBoC on repose, ECB pursues repos

Brown University’s Sahasrabuddhe points out that the PBoC’s approach to swap lines has evolved as well. Its swaps started as tools for trade settlement and renminbi internationalisation instruments: the goal was to settle trade in local currency and expand the footprint of the Chinese currency.

“What is interesting is that more and more countries are either signing new liens or renewing lapsed ones. The renewals have changed in explanation from trade to a backstop. For example, Brazil last year renewed a line it had first signed in 2013 but let lapse in 2016. But this time around, it was justified on the grounds of a bilateral liquidity backstop, not about renminbi settlement or trade, which is what most central banks have said in the past,” she explains.

In contrast to the Fed’s generally laissez-faire approach, China is more restrictive, Sahasrabuddhe claims; some have privileged access, while others need reauthorisation to use it, or their use is limited for trade settlements or repaying Chinese debt. She suggests that the Fed’s decision to “not look” at the use of dollars is a “careful legal decision”, mirrored by Japan when it lends out dollars to India or Indonesia through its swap line with the Fed.

Obstfeld points out that given China’s huge footprint in world trade, extending swap lines makes them a viable source for credit and it may also encourage more renminbi-denominated trade. “I don’t see a downside for a country to have a swap line with the PBoC. The US is campaigning for the dollar but, from China’s perspective, as they hope to increase global use of their currency, expanding swap lines certainly helps that effort,” he says.

“More and more countries now look at these [PBoC] lines as anti-crisis mechanisms as much as trade mechanisms in a way that they were not created for. They have become, on the recipient side, new instruments that countries have as external finance,” Sahasrabuddhe adds.

Paduano does not believe the PBoC swap lines have been very reliable. “I can think of more cases in which the PBoC has restricted, or curtailed, swap line access, than where it is actually positively used to provide financing. I think that semblance of the risk of the PBoC turning a swap line on and off, that reduces the reliability of the line and thus reduces the signalling value of its existence,” he says.

“For Argentina, it’s difficult. The PBoC swap lines incline some observers to think that some parts of the reserves is useless because some of it is swapped with China. That’s a perception you would want to avoid as a central bank. But if you are a country with a segmented system, you should be maximising your options, but examples for those really go back to the Cold War,” he adds. As the PBoC has pulled back proactively launching new lines, the ECB has done the opposite. In February, it announced it would expand its international repo facility, Eurep, to almost all central banks, provided they were not suspected of breaching international sanctions, or engaging in money laundering or the financing of terrorism.

The ECB told Central Banking that it would not disclose the applicants or the recipients of the new and expanded Eurep facility. The first central bank that Central Banking could find to have publicly announced access to the facility is the National Bank of North Macedonia, which was given a repo line with a maximum draw-down of €50 billion on August 11 – a substantial increase compared to the previous arrangement from the pandemic era, which had been capped at €400 million.

Philip Lane, the ECB's chief economist, discussed the expanded Eurep facility at a luncheon in Shanghai on October 21. Lane said that more than 30 central banks had expressed interest in the enhanced facility over the past six months. 

Bahaj says that expanding Eurep is a “sensible move”.

“It ties into the safe asset role. I think that the ECB offering euro liquidity for eurozone government bonds makes those assets more attractive for reserve managers. Whether the attractiveness is big enough to really twist the dial on euro reserves, I don’t know. But it seems to me a very cheap policy that the ECB can implement, which could twist the dial on that willingness,” he says.

He points out that the ECB’s framing – as a ‘service to the world’ move – is less altruistic than establishing swap arrangements. The ECB is taking its own government debt back and lending euros, while charging an interest rate spread for it, he says, adding that the policy is cheap to implement as the ECB is protected against credit risk and there is no currency risk.

“I’m actually surprised that other institutions aren’t looking at this as a policy choice. I would suggest that the BoE should do this. Why not? You could perhaps take more off the gilt yields by doing so. The Japanese may also want to consider it. It’s a very cheap policy to just bid up the value of your government debt and lower borrowing costs,” he says.

Lane said that Eurep and swap lines complement each other from a monetary policy perspective, and strengthen the overall international liquidity lines framework. Eurep is collateral-constrained, so a country with large euro liabilities has to self-insure by holding matching euro assets to use it, whereas swaps draw against local-currency collateral, carry “stronger signalling effects”, and work through the bank-credit channel rather than securities markets.

The ECB’s chief economist said that providing swap lines entails “greater risks”, so it was only appropriate that foreign central banks “clearly capable of repaying their euro debt in due course” would get them, requiring a highly-rated sovereign backing the partner central bank.

“From a European perspective, it is also sensible to restrict swap lines to jurisdictions where the impact on the euro area from defaults on euro-denominated debt or fire-sales of assets – including via indirect or network effects operating through the global financial system – have the potential to impair monetary policy transmission,” he noted.

The official added that the improved repo facility, alongside existing swap lines, raises the international role of the euro and dampens the sensitivity of eurozone prices to shocks.

McCauley believes the expansion of Eurep represents a switch in Brussels and Frankfurt from embracing neutrality to seeking a larger role for the euro in international markets. He likens the expanded facility to the Fed’s Fima. The US central bank’s liquidity support for those outside the US that are deeply engaged in the dollar is seen as one of the draws for the dollar, he says, pointing out that even the cap is similar to the $60 billion offered through Fima.

“The ECB is offering much the same amount, €50 billion per central bank, but in terms of acceptable collateral, the ECB’s offer is actually wider, including supranational bonds. The new ECB standing repo facility no doubt makes holding the euro more attractive as a reserve asset with very little risk to the ECB, given the high-quality collateral,” he says.

Paduano disagrees with the geopolitical angle when it comes to swap lines. “There are occasional proposals that seek to push the ECB to extend swap lines to a wider range of countries. I question that idea from a political viability perspective. I don’t see it as a role of a central bank to play geopolitics, so I would push back on the frame of swap lines as being essentially geopolitical. It does, to some extent, tie back to a state’s geopolitical interests, but geopolitics is not the driver of extending liquidity lines. It’s generally more narrow and approximate than something as broad as geopolitics,” he says.

“If the ECB were to directly provide swap lines to certain partners, that would be very nakedly geopolitical and tricky. How does China feel when it provides a swap line to Argentina, and then Milei comes in and runs a campaign rally against China, straining the relationship and posing real questions about Argentina’s reserves adequacy? It just lays unnecessary pressure on central banks’ external relations. On the other hand, central banks arranging something amongst themselves, like a robust BoE-Fed partnership, that requires strong inter-institutional relationships first and foremost, and it cannot be created in other places,” he adds.

“If this is just some sort of political choreography, and some country does this but does not have any euro reserves, it’s all a bit useless because ‘what’s the point of a repo facility unless you have something to repo?’,” he asks.

Obstfeld notes that there is a financial stability case for expanding Eurep to countries that may have a larger need for euro liquidity. He says that extending more repo lines also promotes the euro’s use internationally.

With the euro case, if such swap lines were created, these countries would issue euro-denominated debt immediately, creating a pressure to accumulate euros

Stephen Paduano, University of Oxford

Sankaran points to the perennial issue of euro-denominated safe assets as something that the ECB could fix by combining regulations and repo practices. He suggests that instead of allowing the bank’s bond portfolio to run off, it could issue a “single safe asset – a common, or sterilisation bond – and satiate the world’s appetite for a euro safe asset, which vastly exceeds any politically feasible mutualisation of fiscal authority”.

“Even if the EU is spending 4% of GDP on defence, what is that? $800 billion coming to market every year is probably not enough. The ECB is the sole authority that is actually authorised to issue joint liabilities,” he says.

“I think it would be interesting to hear the ECB’s opinion about sovereign collateral in a monetary-but-not-fiscal union. The obvious point is France. It is not clear to me that Paris actually has the political ability to do a U-turn on its large fiscal commitments. My sense on things is that these spreads are concerning; the absolute level of yields is not. The fact that France, Spain and Italy are trading so close to each other tells you how investors feel about French fiscal prospects. The absolute level of yields tells me that no one is thinking that this leads to anyone exiting. There is zero currency risk premium, redenomination premium anywhere,” Sankaran adds.

Bahaj believes the ECB’s move will work even without a major expansion in euro-denominated safe assets. “The ECB’s collateral criteria is broad. They see most eurozone government bonds as the same, which is not the case for the markets,” he says.

Paduano is more sceptical. “With the euro case, if such swap lines were created, these countries would issue euro-denominated debt immediately, creating a pressure to accumulate euros,” he says, adding that lower-income countries “also lack the systemic significance that would explain their eligibility for a swap line. Instead, they are accumulating reserves, though slowly”.

“Take any lower-income country thinking about shifting a portion of its bond issuance into euros. I don’t think the ECB can, or should, accept a wide range of African currencies as collateral in an ECB swap line. But if those central banks were to post high-quality eurozone government securities as collateral, that would be great. It just doesn’t seem like, from the eligibility list, that any countries outside the EU periphery would be eligible for such a line,” he adds.

“One of the reasons why they don’t use the Fed repos is that they don’t have a lot of treasuries in the first place. These countries are under-reserved. If you wanted to have liquidity lines using euros, a better way of doing so would be to loosen requirements, extend euros to more countries. You don’t need large uptake to prove utility, you just need countries to be technically eligible for it. Ideally, that would send a good sign to markets. Imagine Kenya issuing a euro-denominated bond, and the ECB pledging euro liquidity. That shouldn’t be taken as an ECB guarantee of the euro-denominated bond, but it would factor into bondholders’ disposition, and lower financing costs for Kenya,” Paduano says.

“The ECB needs to be doing more than just making a press statement about it once every couple of years, saying that we have Eurep standing ready. It has been around for a long time, but it has no real use. Same with Fima repo – no real use. The ECB should be doing a bit more to push it out there because otherwise, the accumulation of alternative reserve assets will go ahead instead. Countries are buying gold instead. I think that making dollar and euro liquidity easier probably gets people to accumulate eurozone government securities and treasuries, which is of course, better for both eurozone governments and Washington,” he explains.

Opening the liquidity gates

Sankaran says central banks should also look at why they are short of dollars. Classic emerging-market deficit countries need dollars for trade credit, which makes them vulnerable and potentially candidates for something that looks like a swap line in extremis; and creditors to the US, who have swap lines because in many instances, they fund local currency liabilities with foreign currency assets, so they need to remove that FX exposure. They do so by hedging their currency exposure by shorting the dollar at the front end of the curve while retaining exposure to US stocks or bonds, Sankaran explains.

“The question is what happens when these countries’ banking systems come under stress? If these swap lines get cancelled and they don’t want to run a currency mismatch, they will have to sell assets,” he says, adding that if the assets they hold are illiquid or are subject to large changes in valuation – as happened during the GFC – there could be a negative feedback loop. “There are a whole range of things that makes creditor countries with swap lines structurally different in ways where the denial of swap lines would provoke mutually assured destruction,” he says.

Sankaran says it is helpful for central banks that are proximate to each other to establish swap lines to enable trade and local currency payments. Brazil, for example, could get around sanctions and dollar dominance by establishing local lines, and, similarly, an India-Myanmar swap line would enable trade but not capital markets use as Myanmar is not borrowing in rupees.

“The more (currencies) the merrier on the trade route, I think. That said, it is probably not a good idea to have the currency denomination of your invoicing veer too far away from the currency denomination of your asset, of your cross-border assets and liabilities, because that could lead to stock-flow consistency problems in that case,” Sankaran says.

“The Brics currency is also better understood as a set of inter-central bank swap lines. But to the extent that it is part of the de-dollarisation discourse, one has to understand that it only functions in the trade arena, not the capital markets arena. It does not make sense for it to diverge that far,” he adds.

Sahasrabuddhe agrees. She points out that there are an increasing number of smaller local currency swaps between countries that are not China. “That is just a way to hedge for smaller economies, or regionally close economies, like those of the Gulf countries, who use them for oil settlements. It may be an option for them to avoid going into dollar-denominated debt,” she says.

Another avenue to explore would be for central banks to make use of the BIS and the IMF – both of which can, and do, provide liquidity lines at times of crisis.

Sahasrabuddhe points out that the BIS plays a critical meeting place, and central bankers see it as an important institution. While BIS swaps existed in the 1960s for mutual surveillance, their role has declined. The most important part of BIS meetings are the invite-only dinners and the bilateral talks in offices, she adds, noting that the IMF provides a similar forum, but with more political entities involved.

“Many countries try to ask for swap lines with the hope that they don’t have to go to the IMF,” she says.

Sankaran agrees: “The BIS is a wonderful institution because it is literally the only place where you have regular meetings between national civil servants. It is a wonderful idea for the head of the PBoC and the head of the Fed to meet each other and just get together every two months – and it will be interesting to see what Kevin Warsh does with this,” he says.

“Central bankers are basically the most internationalist of all global civil servants. They have to be because it’s a function of training. Half of them probably studied with Stanley Fischer at some point. It is a function of socialisation, a function of responsibilities because they are deeply attuned to spillovers,” he adds.

“There were a handful of [BIS liquidity] operations in the late 1960s, including during the Six Day War and on two other occasions at the end of the year. There is a history of BIS swaps with the Fed that were very much precursors of the Fed swaps in 2008,” McCauley notes.

Obstfeld points out that while both institutions lend dollars, the IMF had a liquidity swap facility during the Covid-19 pandemic, which is being phased out because there has been such little demand for it. The BIS, on the other hand, provided a collateralised loan against “some of” Argentina’s gold reserves as a source of financing. The BIS declined to comment.

“I think these institutions can play a role. To some extent, the Fed’s facilities have superseded this role for major central banks, especially during crises, and there just hasn’t been the sort of demand for it,” he adds.

McCauley says that central banks could also band together to fight crises using their US dollar reserve holdings. This presupposes the cancellation of Fed swap lines and a crunch on dollar funding outside the US, either in the eurodollar deposit market or the FX swap market where the dollar legs of swaps mature and need to be rolled over.

“A straightforward approach would be similar to what the Scandinavian central banks did in 2020. They ran parallel operations in which they announced they would lend so many dollars to their banks against their domestic currencies, and they more or less matched each others’ terms. As a result, the operations were bigger than any one of the central banks could pull off by itself,” he explains.

“There are $7 trillion of dollar reserves held by central banks around the world. If the holders of $1 trillion–2 trillion could act together, their firepower would well exceed the high-water marks of the Fed’s dollar swaps back in 2008 or 2020, which were in the neighbourhood of $500 billion–600 billion. Such a dollar lender of last resort cannot offer “whatever it takes” as the Fed did with the ECB, Bank of Japan, Bank of England, SNB and the Bank of Canada. But a limited dollar lender of last resort beats no dollar lender of last resort,” he adds.

Paduano says that new liquidity lines shouldn’t be a higher priority than accumulating reserves.

“Moments of dislocation in the international system, however, create acute opportunities for the sort of recipients who would seek new liquidity lines. If the ECB wants to make a point of euro internationalisation right now and you are a low-income country, I think that puts you peculiarly well-placed to get an audience with [ECB] president [Christine] Lagarde,” he says.