Central banks infuse cash

Stock indexes around the globe reacted favorably after several national banks announced a joint effort to pump more money into the markets.Major central banks across the world on Thursday acted promptly to infuse thousands of millions of U.S. dollars into the financial market to rescue the battered sector and restore confidence among investors.
The Bank of Canada, the Bank of England, the European Central Bank (ECB), the U.S. Federal Reserve, the Bank of Japan, and the Swiss National Bank jointly announced that they would be working together to provide reciprocal credit arrangements to institutions facing a financial crush from the U.S. dollar. The credit arrangements, also known as "swap lines", will be used to help short-term funding of smaller loan groups.

What are these Swap lines ?
In the early 1960s, when the United States began to operate more actively in the foreign exchange market and was reluctant to draw down its gold stock, the U.S. authorities began the practice of establishing reciprocal currency arrangements—or swap lines—with central banks and other monetary authorities abroad, as a means of gaining rapid access to foreign currencies for market intervention and other purposes.

These reciprocal swap lines were developed as a technique for prearranging short-term credits among central banks and treasuries, enabling them to borrow each other’s currencies—if both sides agreed—at a moment’s notice, in event of need. Over time, a network of these facilities was built up,mainly between the Federal Reserve and the major foreign central banks and the Bank for International Settlements.

An advantage of the central bank reciprocal swap lines was that drawings could be activated quickly and easily, in case of mutual consent.Technically, a central bank swap drawing consists of a spot transaction and a forward exchange transaction in the opposite direction. Thus, the Federal Reserve might sell spot dollars for, say Euros, to the German central bank, and simultaneously contract to buy back the same amount of dollars three months later. By mutual agreement, the drawing might be rolled over for additional threemonth periods.

Fed on Swap Lines
Totaling US $180 billion, the Federal Reserve arranged to increase existing swap lines with the European Central Bank from US $55 billion to US $110 billion, and with the Swiss National Bank from US $12 billion to US $27 billion. Additionally, it opened new swap lines with the Bank of Japan for up to US $60 billion, up to US $40 billion with the Bank of England, and up to US $10 billion with the Bank of Canada. These swap lines will be available until January 30, 2009.

Positive Indices
According to official figures, the Bank of England has provided a total of 25 billion pounds (44.8 billion U.S. dollars) to markets since Monday, and the Bank of Japan also pumped a total of 8,000 billion yen (about 76 billion U.S. dollars) into the markets in recent three days.


Nevertheless, the continuous infusion of money into the markets seemed to work. Stocks jumped Thursday after the previous session's drastic decline, but safe assets such as gold and Treasury bills still saw heavy demand as investors are expecting more instability in the financial system.
 
Eye on Russian Markets
 
The Russian markets continued to remain closed for a third day under orders of the Russian government. Russia announced that it would be infusing their own markets with an additional US$ 19.7 billion, half of which would come from the federal budget. Russia's exchanges will re-open on Friday morning