The unprecedented economic sanctions imposed on Russia in response to its invasion of Ukraine posed a calculated risk. The US, the EU and other governments have moved in the face of warnings that their actions could hurt the short-term lending markets that underlie global finances.
To date, the worst concerns of market participants have not materialized. Short-term lending pressure indices have risen, but remain well below the levels of past crises, and Federal Reserve facilities set up during the epidemic to help foreign central banks access dollars have been little utilized.
Although it was too early to clarify everything, investors said that the pipeline of global financial markets seemed to be functioning even as stock and government yields fell and the price of oil and other commodities soared.
“People are nervous. People are scared right now. There’s a fight over funding,” said John O’Connell, portfolio manager at Garda Capital. “But I do not think it will get out of hand.”
The state of the game was highlighted by the movement of an index of dollar financing pressure known as the FRA-OIS gap. It rose from 0.26 percentage points on Thursday to 0.38 percentage points on Friday, before dropping back to 0.35 percentage points.
This was its highest level since April 2020. But it was still far from its peak of almost 0.8 percentage points in March 2020 or more than 2.1 percentage points during the 2008 financial crisis.
The three-month commercial paper rates – which allow companies and banks to lend to investors in short periods of time – also rose to 0.6%, but remained well below the levels hit when Cubid-19 arrived in the US in early 2020.
Another positive indicator came from currencies such as the Mexican peso and the South African rand, which are expected to shrink in the event of a serious shortage of dollar funding. Both were relatively stable.
The markets were put to the test when governments imposed sanctions on Russia’s central bank, limiting its ability to access foreign reserves of about $ 630 billion, including dollars it would normally be able to lend to finance markets.
Investors, bankers and analysts said the impact was lessened by the existence of Fed programs set up during the epidemic to keep dollar financing markets active.
The fixed repo framework, which became fixed in July, allows U.S. banks to exchange bonds for dollars. The Facility of Foreign and International Monetary Authorities (FIMA) grants the same privilege to foreign central banks. The so-called exchange lines allow foreign central banks to temporarily borrow dollars.
A sign that other countries have managed to access the dollars, no foreign central bank has contacted FIMA as of Friday, and the use of exchange lines remains minimal.
When asked by U.S. lawmakers Wednesday about dollar-funded markets, Fed Chairman Jay Powell said they were “functioning well.” According to him, “a large amount of liquidity” passes through the system.
“Between our exchange lines and our repo framework for other foreign central banks and our permanent repo facility in the finance market, we have established liquidity provision,” he said.
Laurie Logan, a clerk in the New York Fed’s markets group, suggested in public comments on Wednesday that the existence of these liquidity facilities was enough to ensure smooth functioning, even when usage remained low.
“Their presence has also provided confidence in available liquidity and knowing that these are there and operationally, I think that has reduced some of the cautious demand for liquidity that could have arisen against the background of the increased uncertainty that has emerged in recent days,” Logan said. .
Bankers also said they had been informed in advance by Biden government officials about the possibility of sanctions on the Russian central bank, which would allow them to prepare for the impact.
Financial system withstands first week of Russia sanctions Source link Financial system withstands first week of Russia sanctions