US Fed extends 15 bln dlr swap line to New Zealand

Wednesday October 29, 6:36 AM


The US Federal Reserve said Tuesday it had extended a temporary 15-billion-dollar currency "swap" line to New Zealand's central bank to help it boost lending and unblock the global credit squeeze.

Under the reciprocal agreement, the Reserve Bank of New Zealand is authorized to swap its currency for up to 15 billion dollars in the US currency, "to address ongoing, elevated pressures in US dollar short-term funding markets," the Fed said in a statement.

"This facility, like those already established with other central banks, is designed to help improve liquidity conditions in global financial markets," it added.

The deputy governor of the Reserve Bank of New Zealand, Grant Spencer, said the facility is to provide an additional source of liquidity for the US dollar funding market.

"While there is no need to use the facility right now, it is useful to have this capacity if markets become dysfunctional," Spencer said in a separate statement.

The New Zealand central bank is the 10th to receive a temporary swap arrangement from the Federal Open Market Committee, headed by chairman Ben Bernanke, amid the global financial crisis that has left lending at a virtual standstill.

The FOMC has previously authorized such arrangements with the European Central Bank, the Bank of England, the Bank of Japan and the central banks of Australia, Canada, Denmark, Norway, Sweden and Switzerland.

The swap agreement with the US central bank comes as New Zealand is mired in recession for the first time in a decade.

The economy shrank in the first and second quarters of this year, meeting the technical definition of recession as two consecutive quarters of contraction.

The country's central bank five days ago cut the official interest rate by a record one percentage point in the face of the credit crunch.

The cut to 6.5 percent was the biggest since the Reserve Bank of New Zealand introduced the official cash rate in 1999; it had never cut the rate by more than half a percentage point.

The head of the central bank, Alan Bollard, at the time said the global financial crisis and deteriorating prospects for world growth meant the outlook for the New Zealand economy had worsened.

"New Zealand can expect to face lower demand for exports and credit is likely to be less readily available," Bollard said Thursday.

The central bank cut interest rates by half a percentage point at its last review in September, citing the financial crisis. The bank cut rates for the first time in five years in July.

Despite the continuing financial turmoil, Bollard told a news conference the economic fallout was "nothing like the 1930s Depression."

"We see a flattish economy for a while, but not necessarily an economy that continues in recession," he said.