Tags: Fed | Extends | swap | Program | Europe | Debt | Crisis

Fed Extends 'Swap' Program to Ease European Debt Crisis

Tuesday, 21 Dec 2010 09:43 AM

The Federal Reserve extended a program set up earlier this year to ease strains from the European debt crisis.

The program, which was set to expire in January, will now run through Aug. 1, the Fed announced on Tuesday.

The Fed is lending dollars to other central banks in exchange for their currencies. The central banks can lend those dollars out to banks in their home countries to ease financial turmoil.

The Fed's "swap" program was set up in May as fears rose that Greece's debt crisis could engulf other European countries. European banks need dollars to lend to companies across the continent. European companies that have operations in the U.S. pay their employees in dollars and buy raw materials with the U.S. currency.

The Bank of Canada, the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank all have swap arrangements with the Fed.

"The reality is Europe isn't out of the woods yet. This extends a tool to central banks if they need it," said Nariman Behravesh, chief economist at IHS Global Insight.

Use of the program peaked in May, shortly after the swap arrangements were set up. The Fed had lent the European Central Bank $9.2 billion, and was repaid.

In June, the Fed had lent $6.64 billion through the program. Most of the money went to the European Central Bank, and was repaid. Use of the program has since waned. As of early December, the Fed lent only $60 million to the European Central Bank.

However, the debt crisis has spread from Greece to engulf Ireland, which required a $90 billion bailout in late November from the European Union and International Monetary Fund. The crisis threatens other European countries, including Spain and Portugal.

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