Fed Creates Swaps With South Korea, Brazil, Mexico

By Steve Matthews and William Sim

Oct. 29 (Bloomberg) -- The Federal Reserve agreed to provide $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore in its biggest effort yet to curtail the spread of financial market turmoil beyond developed economies.

The Fed set up ``liquidity swap facilities with the central banks of these four large systemically important economies'' effective until April 30, the central bank said today in a statement. The arrangements aim ``to mitigate the spread of difficulties in obtaining U.S. dollar funding in fundamentally sound and well managed economies.''

The global credit crisis that started last year with the collapse of the U.S. mortgage-backed securities market has roiled developing nations, sending the premiums on their government bonds up and their currencies down. Today's Fed announcement coincided with a decision by the International Monetary Fund to almost double borrowing limits for emerging market countries.

``The Fed is there to support large emerging markets that have done their homework over the past several years like South Korea, Brazil, Singapore and Mexico,'' said Alonso Cervera, a Latin America economist with Credit Suisse Group in New York. ``These are large, relevant emerging countries that have followed responsible fiscal and monetary policies for the past several years and now are going through tough times.''

The yield premium on emerging-market dollar bonds over U.S. Treasuries narrowed today by 61 basis points, or 0.61 percentage point, to 7.21 percentage points, according to JPMorgan Chase & Co.'s EMBI+ index. The spread has jumped 5.72 percentage points from a record low of 1.49 percentage points in June 2007, and reached its widest since 2002 earlier this month.

Global Crisis

``The hoped-for result is that we don't see the global financial crisis worsen still more,'' said Lyle Gramley, a former Federal Reserve governor who is now senior economic adviser at Stanford Group Co. ``The Fed is making dollars available to the central banks of these countries who are trying to meet the needs of their banking systems.''

The Fed also created this week a $15 billion swap line with its New Zealand counterpart and removed limits this month on four existing swap lines, including one with the European Central Bank. The Fed set up a $10 billion arrangement with Australia's central bank last month and then tripled it to $30 billion.

The Bank of Korea cut interest rates by a record amount on Oct. 27 and the government pledged to guarantee local banks' debts to help lenders struggling to access foreign funds. Stocks and the won tumbled last week, prompting concern the country may face a currency crisis a decade after the IMF organized a $57 billion bailout to help repay overseas debt.

``The Bank of Korea will continue to strive for financial market stability through cooperation with other central banks,'' the bank said in a statement. Using the swap line, the central bank ``will provide liquidity in Korea through competitive auction facilities to banks established in Korea.''