ECB dollar swap lines: solidarity and precaution

By Mike Dolan - Analysis

LONDON (Reuters) - European central banks' decision to rejoin the U.S. Federal Reserve in its latest financial system fix on Tuesday was a show of solidarity in crisis management but also an acknowledgement of several more months of pressure.

Precaution rather than reaction was likely to have been the reason behind reopening dollar taps into Europe, analysts said.

As the Fed detailed its second $200 billion market stabilization plan in a week on Tuesday, the European Central Bank and Swiss National Bank said they would this month auction up to $21 billion of one-month dollar funds for domestic banks.

A reprise of the dollar swap lines set up between the Fed and ECB and SNB in December, the move marked a reversal of the ECB's decision on Feb 1 to close the December swap windows as money markets calmed over yearend and through January.

Yet while the December foray was clearly prompted by an extreme shortage of dollar funding in Europe, bankers said there was no obvious signal of a equivalent squeeze this month.

Most reckon reopening the so-called Term Auction Facilities into Europe was more likely intended to signal common concern about wider credit market malfunctioning -- which also engulfed non-German euro zone government bond markets among others this month -- than addressing a new dollar funding shortage per se.

"They clearly want to instill some confidence that all the world's central banks are aware of the problem and making a concerted effort," said Pavan Wadhwa, interest rate strategist at JP Morgan in London, adding that more policymaker solidarity will be needed as the crisis intensifies.

The move, likely discussed by top central bankers meeting in Basel at the weekend, does not necessarily mean the dollars will be drawn down. The Fed opened $90 billion of similar swap lines with foreign central banks after the September 11, 2001 attacks on the United States but only $20 billion was taken up.