NEW YORK—The banning of certain Russian banks from the SWIFT international payment system could push central banks to enhance liquidity to offset missed payments, a Credit Suisse strategist said on Sunday.
Western nations announced on Saturday a harsh set of sanctions to punish Russia for its invasion of Ukraine, including blocking some banks from the SWIFT international payments system.
Major banks were working this weekend to get to grips with the raft of new sanctions and their full implications, while markets braced for more volatility as the measures could disrupt global trade and hurt Western interests as well as Russia.
“Exclusions from SWIFT will lead to missed payments and giant overdrafts similar to the missed payments and giant overdrafts that we saw in March 2020,” Credit Suisse’s Zoltan Pozsar said in a note.
Back in March 2020, the U.S. Federal Reserve enhanced efforts with other major central banks to ease a global dollar-funding crunch, as part of emergency measures to stem the financial and economic fallout from the coronavirus pandemic.
“The virus froze the flow of goods and services that led to missed payments, and war has led to exclusions from SWIFT that will lead to missed payments again,” said Pozsar.
“One would assume that central banks would re-activate daily swap line operations now that the SWIFT option got invoked. Central banks should stand ready to make markets on Monday again,” he added.
To counter inflation, the Fed has announced plans to reduce its balance sheet this year, after it roughly doubled in size during the pandemic to nearly $9 trillion as it bought bonds to help keep longer-term interest rates down.
But the Fed’s balance sheet may expand again before shrinking through so-called quantitative tightening, a reversal of the Fed’s bond-buying programme, Pozsar said.
“The consequence of excluding banks from SWIFT is real, and so is the need for central banks to re-activate daily U.S. dollar funds supplying operations”, he said.
