South Korea central bank to infuse cash via 'unlimited' repos for first time

SEOUL (REUTERS) – South Korea’s central bank said on Thursday (March 26) it will temporarily offer an unlimited amount of money for three months through repo operations, an unprecedented move to funnel cash to money markets hammered by the coronavirus pandemic.

Repo auctions will be held every week, where a wider range of financial institutions will be able to borrow funds at the repo rate of no higher than 0.85 per cent, the BOK said in a statement.

The BOK also said it would accept a wider range of collateral including notes issued by state-run companies in the repo auctions – where central banks lend money to commercial banks and brokerages who can deposit government debt as collateral.

Thursday’s news follows similar policy moves by central banks around the world as policymakers race to bolster stimulus to tackle the economic and financial impact of the coronavirus.

On Monday, the US Federal Reserve pledged to back purchases of corporate bonds and buy unlimited amounts of Treasury bonds for the first time to ensure credit flows to corporations and local governments.

The BOK too is entering unchartered territory by pledging to offer an ‘unlimited demand’ for liquidity from domestic markets, after slashing interest rates by 50 basis points to 0.75 per cent on March 16 in its largest policy easing since the global financial crisis.

It is also working in tandem with the government, after President Moon Jae-in on Tuesday doubled a planned economic rescue package to 100 trillion won (S$118 billion) to save companies hit by the coronavirus and put a floor under crashing stocks and bond markets.

“Through this (repo operations), we will be supplying enough money to the government’s 100 trillion won rescue package programmes,” the BOK said.

The cost of raising US dollars by swapping the South Korean won surged to the highest since the global financial crisis earlier this month while the spread between corporate bonds and treasury debt has been widening, in a sign of tightening money market conditions.

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Coronavirus: European banks get US$130 billion, easing dollar stress

FRANKFURT (BLOOMBERG) – European banks took US$130 billion made available by the US Federal Reserve on Wednesday, helping ease the funding stress from the coronavirus pandemic.

Lenders from the euro zone borrowed the bulk of the money – US$112 billion in operations coordinated by the European Central Bank. That’s the biggest use of the crisis-era swap lines since the global financial meltdown more than a decade ago.

UK lenders took US$15.5 billion via the Bank of England, and Swiss institutions took US$2.6 billion. Banks were offered loans for 84 days at 0.38 per cent and and 7 days at 0.45 per cent.

The increased demand comes as signs of stress flare up in funding markets, with the premium for getting dollars against several of the world’s major currencies exploding amid concerns over liquidity.

The early reaction to the dollar operations in funding markets was promising. Cross-currency basis swaps for euro-dollar, a proxy for how expensive it is to acquire the greenback, retreated further from levels last seen in 2011, touched Tuesday.

On Sunday, the Fed on Sunday beefed up existing swap lines with the world’s major central banks including the ECB, the Bank of Japan, the Bank of Canada and the Swiss National Bank as part of its easing package, lowering their cost and extending their duration.

Problems with sourcing dollars are reminiscent of the stress faced by the financial system at the onset of the 2008 financial crisis. Central-bank swap arrangements were designed to prevent the repeat of such troubles in the future.

The provision of dollar funding comes a day after the ECB lent banks 109.1 billion euros until June, when more favorable targeted long-term loans become available.

Policy makers globally are scrambling to provide an effective safety net for the economy, which is all but certain to fall into recession as production is hit and services shut down.

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