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Mr. Adolfo Barajas, Andrea Deghi, Mr. Salih Fendoglu, and Yizhi Xu
This note analyzes recent trends in offshore US dollar funding markets and explores the drivers of dollar funding costs during the COVID-19 pandemic crisis. Preliminary evidence suggests that only part of the sharp increase in observed dollar funding costs can be attributed to the standard supply- and demand-side factors analyzed in the October 2019 Global Financial Stability Report (GFSR), including the dollar funding fragility of non-US global banks. Changes in market structure since the global financial crisis, as well as heightened uncertainty and tensions in the commercial paper market, may provide further explanations for the movements in dollar funding costs in late March 2020. The US Federal Reserve’s swap line arrangements have helped lessen strains in dollar funding markets, but funding pressure remains significant for some emerging market economies, notably those with-out access to the swap lines. Furthermore, tighter dollar funding conditions appear to have accompanied increases in financial stress in the home economies of affected non-US global banks and to have generated adverse spill-over effects in the form of cutbacks in cross-border lending.
Mr. Adolfo Barajas, Andrea Deghi, Mr. Salih Fendoglu, and Yizhi Xu

Canada, the euro area, Japan, Switzerland, the United Kingdom, and the United States enhanced the provision of liquidity via the standing US dollar liquidity swap line arrangements and (2) March 19, when the Federal Reserve announced the establishment of new temporary US dollar swap lines with nine additional central banks. Swap line currencies correspond to the Australian dollar, Brazilian real, Canadian dollar, Danish krone, euro, British pound, Japanese yen, Mexican peso, New Zealand dollar, Norwegian krone, Singapore dollar, South Korean won, Swedish krona, and

International Monetary Fund. Research Dept.

through the standing US-dollar-liquidity swap line arrangements. On March 19 the Federal Reserve established temporary US dollar swap lines with the Reserve Bank of Australia, Banco Central do Brasil, Danmarks Nationalbank, Bank of Korea, Banco de Mexico, Norges Bank, Reserve Bank of New Zealand, Monetary Authority of Singapore, and Sveriges Riksbank. On March 31 the Federal Reserve launched a temporary repurchase agreement facility to enable a wide range of central banks and monetary authorities to exchange US Treasury securities for US dollars. 2 The loss of

International Monetary Fund. European Dept.
The COVID-19 pandemic has led to severe socio-economic dislocations and hardship. Supported by an unprecedented policy response and by the easing of lockdown measures as the infection rate moderated, the euro area economy initially recovered strongly from the pandemic’s first wave. However, a large second wave and reimposition of containment measures suggest much slower growth momentum in the near term. The outlook is for a subdued economic recovery and low inflation, with a significant permanent output loss relative to the pre-crisis trajectory. Uncertainty remains extremely high, mainly due to different pandemic scenarios, including regarding the availability and effectiveness of potential vaccines and therapies and behavioral changes. Output growth is expected to be much lower through 2021Q1 than projected in 2020 October World Economic Outlook (WEO) but may rebound beyond then in light of recent promising news on vaccine development. The key policy challenge is to continue countering the pandemic while facilitating a robust and inclusive recovery, including by addressing the health crisis, containing economic scarring, supporting resource reallocation and transformation to greener and more digital economies, and limiting the crisis’s impact on inequality and poverty. In a downside scenario, sizable further stimulus would be needed.
International Monetary Fund. European Dept.

. March The U.S. dollar liquidity swap line arrangement with the U.S. Federal Reserve (and other major central banks) was reactivated. The frequency of the 7-day USD operations was reduced to three times per week in June, and then once per week in September. April Relaxation of collateral standards by (i) widening the scope of the Additional Credit Claims (ACC) framework to include public sector-guaranteed loans to SMEs, self-employed individuals, and households; (ii) adopting a general reduction of collateral valuation haircuts (-20 percent) together