Pozsar Flags Need To Re-Open USD Swap Lines

Credit Suisse’s Zoltan Pozsar released a rather ominous note over the weekend, noting that “we believe there is no difference between Lehman unable to pay back money funds because its tri-party clearing agent was unwilling to unwind o/n repo trades, and banks unable to receive and make payments because they are out of SWIFT. The Herstatt risk – settlement risk – owes its name to a mishap at a single bank. The risk in the current scenario involves an entire country’s banking system. Banks’ inability to make payments due to their exclusion from SWIFT is the same as Lehman’s inability to make payments due to its clearing bank’s unwillingness to send payments on its behalf. History does not repeat itself, but it rhymes. The consequence of excluding banks from SWIFT is real, and so is the need for central banks to re-activate daily U.S. dollar funds supplying operations. Excess reserves and o/n RRP balances won’t be enough. And so the Fed’s balance sheet might expand again before it contracts via QT – and not just because of the swap lines. The FIMA repo facility is also there to turn collateral into dollars – anonymously, away from the prying eye of dealers, if a central bank becomes a friendly correspondent for a sanctioned central bank turning gold into cash. That, or an unforeseen call on unwanted reserves in the o/n RRP facility as the correspondents flood the repo market with collateral.”