From Credit Suisse, February 27:
Global Money Dispatch
I’ll never forget the late-night briefing on Friday before Lehman’s bankruptcy where according to one line of argument Lehman’s problems were so widely understood that the system had enough time to hedge itself so that the actual default would be manageable. It didn’t turn out like that... If a bank closes a $200 billion balance sheet on Friday and doesn’t open on Monday, someone’s $200 billion wasn’t hedged by definition. The same with exclusions from SWIFT – the payments messaging system banks use to send and receive payments.
Exclusions from SWIFT will lead to missed payments and giant overdrafts similar to the missed payments and giant overdrafts that we saw in March 2020.
Back then we warned that “supply chains are payment chains in reverse” and that lockdowns would lead to missed payments everywhere. Today we’ll say that all global payments go through SWIFT (including payments for commodities) and so exclusions from SWIFT will lead to missed payments everywhere again: the virus froze the flow of goods and services that led to missed payments, and war has led to exclusions from SWIFT that will lead to missed payments again. But by design, and not without a risk of retaliation: if a freeze in activity can lead to missed payments, an inability to receive payments through SWIFT can freeze the flow of goods, services, and commodities like gas or neon in kind.
We are dealing with pipelines here – financial and real. In the present context, they are two sides of the same coin. Inability to receive may mean unwillingness to send. Commodity flows aside, one would assume that central banks would re-activate daily swap line operations now that the SWIFT option got invoked.
Central banks should stand ready to make markets on Monday again...
Sanctioning central bank reserves can turn a surplus agent into a deficit agent overnight as discussed here. The Bank of Russia (BoR) has neither Treasuries to repo with the new FIMA repo facility, nor dollar swap lines with the Fed, and if its assets are frozen, it can’t raise dollars to provide for its domestic banks.
Central bank deposits, bank deposits, and securities are all “inside money” – that is, money and money-like claims that are someone else’s liability – and it’s situations like this when “outside money” – money claims like gold bullion that are no one’s liability – is king, especially if stored in vaults domestically. Unlike balances at the Deutsche Bundesbank, western G-SIBs, or Euroclear, you control what you have. Gold is a sovereign’s money under the mattress, and the BoR has more of it than deposits at foreign central banks (see chart)!....
....MUCH MORE (4 page PDF)
HT: Jim Bianco
British betting shops have the DJIA opening down 525, probably right for direction, no idea about magnitude.
