Merry Christmas from the ECB … and Happy New Year from the Federal Reserve!

The $50 billion in renewed currency swap lines at the beginning of December was a nice stocking stuffer for the euro zone. Here’s how it’ll work:

Basically, the Fed will lend dollars to the European Central Bank (ECB) in return for euros for a specific period. Since the Fed isn’t lending to banks directly, the risk is essentially nonexistent. And it also isn’t exposed to changes in currency rates since the exchange rate is set for the duration of the swap.

So the euro zone gets a pressure-release valve for funding markets without exposing the U.S. central bank to much risk.

And you might recall the recent disclosure of the $7.7 trillion that the Federal Reserve loaned out to global banks to stem the impact of the 2008 financial crisis.

But …

The Biggest Present Has
Yet to Be Delivered!

Almost 500 billion euros in three-year, cut-price loans were provided to banks by the ECB on Wednesday. That is officially the most money-pumping the ECB has ever done! And it was more than economists had been expecting.

What’s more, it comes right after the “successes” of Spanish debt auctions and other euro-zone “hopes” that provided an early-week boost to the markets.

“Now,” the ECB is telling banks, “be good little boys and girls, go out and spend that money on junk your parents wouldn’t approve of.”

And by ‘junk’ I mean ‘sovereign debt of peripheral euro-zone countries.’

Here are some more details of this gift, from Reuters:

“The 3-year funds were offered at an interest rate which will be the average of ECB’s main interest rate over the next three years. That benchmark rate is, after a rate cut earlier this month, at a record low of 1 percent.

“For some banks the new money could be more than 3 percentage points cheaper than they can get on the open market.”

Don’t you just love Christmas time? It is a season of giving.

Thus, many sit and wonder what form QE3 may take and when it might be granted to the markets.

Others worry that the U.S. may try to bail out the euro zone more directly than through its recent swaps arrangements.

Perhaps the Fed will go the expected route of buying up mortgage-backed securities (MBS). The palatability of additional bailout/stimulus in the U.S. is pretty low. But something aimed more directly at the withering U.S. housing market would probably be tolerated a bit better than past efforts.

And you could consider MBS purchases a done deal if the Fed/Treasury also wants to head down the path of rescuing Europe. The majority of Americans probably won’t fully understand the need and efficacy of a U.S.-to-Europe bailout. But they will surely be ticked off if the Fed is seen as doing something for Europe but nothing for the U.S.

Christmas is tomorrow. But this bailout package probably won’t be delivered until midway through 1Q12 at least … despite the wonderful headlines that would materialize should Santa Bernanke drop by tonight.

But since Ben has probably just settled down for a long winter’s nap, his gift will be one to welcome the New Year. Sources point to a reference by Distinguished Professor of Real Estate Finance, Anthony Sanders in a testimony to the Congressional Oversight Committee:

… according to Sanders, the relaunch of the Fed’s swaps program may “get to the $1 trillion level, or perhaps even higher.”

That’s a good twenty times larger than the recent relaunch and nearly twice as large as the peak of the program after the Lehman Brothers collapse! Oh boy.

But when you start using esoteric words like ‘fx’ and ‘swaps’ and ‘lines’ people stop listening because it’s tough to make the connection of how that arrangement impacts the taxpayer. Which is why it will make more sense to focus attention on the IMF …

No country will be spared, says IMF head Christine Lagarde.

From Christine Lagarde referring to her playbook for saving the euro zone —

“There is no economy in the world, whether low-income countries, emerging markets, middle-income countries or super-advanced economies that will be immune to the crisis that we see not only unfolding but escalating.

“If the international community doesn’t work together, the risk from an economic point of view is that of retraction, rising protectionism, isolation.

“It is not a crisis that will be resolved by one group of countries taking action. It is going to be hopefully resolved by all countries, all regions, all categories of countries actually taking action.

“What is happening now is that conversations, contacts are taking place between the fund and its membership about the scale and the amount in which this could be brought to a conclusion.”

Will the Fed Sneak in
Another Rescue Move?

Everyone knows the U.S. is the largest player in the IMF, especially considering the state of European economies. And there is a tangible enough connection between the United States’ IMF exposure and the receipt for the U.S. taxpayer.

Sounds like the perfect smokescreen for the Federal Reserve to boost those swap lines while the U.S. public is fighting the rescue initiatives of the USA via the IMF.

As German Finance Minister Wolfgang Schaeuble has said,

“Washington cannot make bilateral loans available to the IMF without Congress approving it … and there’s no chance of that and the American government has always made that clear.”

Perfect — thank you, IMF, for another non-event to help Europe kick the can a little further down the road while countries navigate ratings downgrades, lackluster bond auctions, uncomfortably high lending rates, national austerity, agreement on zone-wide fiscal cohesion, capability of bailout fundraising and decisions to transfer funds from recently popularized acronyms, like EFSF and ESM, into the IMF.

Merry Christmas from the European Central Bank!

Happy New Year from the Federal Reserve!

Just keep all that in mind as you place your bets on the timing of the coming financial system collapse!

And a sincere Merry Christmas from me to you.

Jack

P.S. My World Currency Trader subscribers have been well-positioned to profit from the euro’s continued decline. In fact, they could have pocketed up to 28 percent, before commissions! And you can join them, RISK FREE. To learn how, click here.