Drawing the line: the politics of federal currency swaps in the global financial crisis

Abstract

Injecting over two trillion dollars into the international economy, the Federal Reserve effectively operated as an international lender of last resort during the 2008 financial crisis. Over half a trillion dollars went to foreign central banks through bilateral arrangements known as Central Bank Liquidity Swaps. While studies show that a key determinant of a country’s chances of receiving Fed liquidity was the exposure of US banks to the foreign economy, the literature overlooks the ambiguous and politicized nature of the Fed’s decision-making that explains the selection of emerging market swap recipients. Through a consideration of all economies that officially requested a swap line, including those rejected, this article analyses the bilateral politics of Fed swaps. By evaluating transcripts of the Fed’s deliberations, it identifies strategic motivations underlying the Fed’s decision-making and argues the Fed was more likely to grant a swap to economies that shared its policy preferences for greater capital account openness. Further, the article argues that the influence of shared policy preferences was mediated by political and diplomatic considerations. The article concludes that the Fed strategically chose its emerging economy partners to reinforce economic alliances, particularly with those who experienced increased influence in economic governance post-2008.