Selective Swap Arrangements and the Global Financial Crisis: Analysis and Interpretation

28 Pages Posted: 29 Mar 2009 Last revised: 1 Jan 2023

See all articles by Joshua Aizenman

Joshua Aizenman

University of Southern California - Department of Economics

Gurnain K. Pasricha

University of California, Santa Cruz - Department of Economics

Date Written: March 2009

Abstract

The onset of the US credit crisis in 2008, and its rapid globalization induced the FED to extend unprecedented swap-lines of 30 billion dollars to four emerging markets, and the proliferation of other cross-countries selective swap arrangements. This paper explores the logic for these arrangements, focusing on the degree to which financial and trade linkages, financial openness and credit risk history account for discerning the formation of swap arrangements to EMs. We also study the impact of the formation of these credit lines on the exchange rate and the financial spreads of the relevant countries. We find that exposure of US banks to EMs is the most important selection criterion for explaining the "selected four" swap-lines. This result is consistent with the outlined model, where we show that in circumstances of unanticipated deleveraging, emergency swap-lines may prevent or mitigate costly liquidation today, allowing investment projects to reach maturity and providing positive option value to both the source and the recipient countries. The FED swap-lines had relatively large short-run impact on the exchange rates of the selected EMs, but much smaller effect on the spreads (measured relative to that of other EMs that were not the recipients of swap-lines). Specifically, non-swap countries saw an average depreciation of 0.15% on the day after swap announcement, but swap countries saw their exchange rate appreciate on average, by about 4%. Yet, all the swap countries saw their exchange rate subsequently depreciate to a level lower than pre-swap rate, calling into question the long-run impact of the arrangements.

Suggested Citation

Aizenman, Joshua and Pasricha, Gurnain K., Selective Swap Arrangements and the Global Financial Crisis: Analysis and Interpretation (March 2009). NBER Working Paper No. w14821, Available at SSRN: https://ssrn.com/abstract=1369057

Joshua Aizenman (Contact Author)

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall 300
Los Angeles, CA 90089
United States

Gurnain K. Pasricha

University of California, Santa Cruz - Department of Economics ( email )

Santa Cruz, CA 95064
United States

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