Liquidity Swaps between Central Banks, the IMF, and the Evolution of the International Financial Architecture

The 9/11 terrorist attacks in New York, then the 2008 crisis and the euro crisis have seen a major monetary innovation in the form of large-scale exchanges of liquidity swaps between core central banks. For instance, the US Federal Reserve and the European Central Bank exchanged for a few days or weeks equivalent amounts of their respective currencies, so that the ECB could lend dollars to eurozone commercial banks, and vice versa. At maturity, the swaps were either extended over time or reimbursed. This utterly simple operation thus allows central banks to act collectively as a Fed-led, network-based international lender of last resort. A significant corollary is that the action of the IMF, which used to be the main international crisis manager, now extends only to the developing countries and the (smaller) emerging countries. Conditionality, with its strongly asymmetric dimension, is limited to this latter group, while unconditional swaps are now the key liquidity channel for supporting the rich and powerful countries.