Federal Reserve to Lend Cash to Emerging Nations

By Neil Irwin
Washington Post Staff Writer
Wednesday, October 29, 2008 3:30 PM

The Federal Reserve said today it will lend money for the first time to central banks in several emerging nations, as it tries to prevent a global shortage of dollars.

The central bank said it is establishing "swap lines" of up to $30 billion each with the central banks of Brazil, Singapore, Mexico and South Korea. This will allow those banks to pump cash into their respective financial systems. The program is an expansion of a program that had previously only been available to developed nations, such as Japan, Canada and Britain.

In a related move, the International Monetary Fund this afternoon announced a new "Short-Term Liquidity Facility," also designed to help countries around the world withstand runs on their currencies.

The two actions are broad efforts to shore up confidence in emerging nations that are at risk of experiencing a cash crunch but that are otherwise economically sound.

Investors, averse to taking any risks amid a global financial crisis, have been pulling their money from developing nations. With their new programs, U.S. and international policymakers are trying to prevent a deepening crisis by making sure such nations have ready access to foreign currency.

These emerging countries have been a major source of global economic growth in recent years, and if they were to experience a deep crisis of their own, it could further lead the world economy toward a downward spiral.

The Federal Reserve action exposes the central bank to some risk. Its swap lines have so far been with long-established central banks, with which there is virtually no risk of not being paid back. The central banks in emerging nations -- Banco Central do Brasil, Banco de Mexico, Bank of Korea, and the Monetary Authority of Singapore -- could pose greater risks.

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