It’s not the first time that FT Alphaville has reported on potentially destabilising currency shortages in the international financial system and the emergency swap arrangements central banks have taken to ease them.
Usually, however, such shortages are focused on illustrious hard currencies like the US dollar or (in the case of eastern European mortgages), the Swiss franc or the euro.
While technically sterling still qualifies as a hard currency reserve asset, it’s been a long time since anyone had much love for it. The Great British Krona, as we have likened it, has been beaten up in the markets ever since the UK opted out of the European Union.
But in an unexpected turn of events, the Bank of England announced an intriguing swap arrangement with the Bank for International Settlements on Tuesday which insinuates there could be a sterling shortage doing the rounds:
Swap arrangements of this sort are usually structured via bilateral or multilateral frameworks between central banks. In fact, we are hard pressed to think of any time the BIS has been used as a go-between intermediary in recent time.
The only other swap arrangement that comes to our mind immediately is the equally mysterious gold swap arrangement the BIS undertook in 2010. The rationale for this, it was speculated at the time, was either purely economic (ie the BIS spotted an imbalance in the market and decided to act on it for system stability reasons) and/or intended to mask the real intended beneficiary of the arrangement, also for stability reasons.
So the big question now is who in the world is currently short of sterling or about to be short of sterling? And why?
The GBP swap markets with the other big currency players offer no insight as they are behaving normally.
We’ll have more on this as we get it.
Update (3.25pm): Sources tell us this is an entirely technical issue and a matter of contingency planning. As noted before, there is no indication of any stress in the GBP swap markets either. We should also emphasise that a swap arrangement of this sort relates to easing potential sterling liquidity shortages in international markets not domestic ones.