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THE EURODOLLAR SYSTEM
Part 1: Origins & Mechanics
Part 2A: Crisis Patterns (1997 & 2008)
► Part 2B: The Pattern Completes (2011, 2019, 2020) (You are here)
Part 3: Current Vulnerabilities
Part 4: Alternatives & Endgame
RECAP: THE PATTERN ESTABLISHED
In Part 2A, we documented how the Eurodollar crisis cascade emerged:
- 1997 Asian Financial Crisis: The template—dollar funding stress triggers currency collapses, asset fire sales, regional contagion
- 2008 Global Financial Crisis: European banks face massive dollar run; Fed provides unlimited swap lines, effectively becoming global lender of last resort
The architecture that caused both crises—offshore dollar funding without formal backstop, synthetic dollar creation via FX swaps, maturity mismatch requiring continuous rollover—remained unchanged. The "solution" was Fed intervention, not structural reform.
Now we document the final three crises, showing that the pattern cannot break because the architecture serves too many powerful interests to be reformed.
CRISIS #3: THE 2011-2012 EUROPEAN DEBT CRISIS — THEY NEEDED RESCUE AGAIN
Just three years after the 2008 crisis, Europe faced renewed dollar funding stress—proving that 2008's "solutions" had preserved fragility rather than resolving it.
The Setup: Sovereign Debt + Bank Dollar Exposure
The 2008 crisis left European governments with massive debts from bank bailouts and stimulus spending. By 2010-2011, concerns about sovereign solvency (Greece, Ireland, Portugal, Spain, Italy) created a new crisis:
- Sovereign-bank doom loop: Banks held government bonds; governments guaranteed banks; each's weakness threatened the other
- European banks still held large dollar-denominated assets (hadn't unwound post-2008)
- Funded via short-term Eurodollar markets and FX swaps (same vulnerabilities as 2008)
This was a slow-motion dollar run—exactly what happened in 2008, just more gradual.
The Trigger: Greek Crisis Escalation (2011)
July 2011: Greek debt crisis intensifies; contagion fears spread to Italy and Spain
August 2011: Stock markets plunge globally; Italian and Spanish bond yields spike
September-November 2011: Dollar funding stress builds as U.S. MMFs withdraw from European banks
November 2011: Dollar funding costs spike dramatically — EUR/USD basis widens sharply, reaching levels comparable to late 2008
The Cascade: Same Pattern, Slightly Different Trigger
Stage 2-3: FX Swap Basis Widens, Markets Segment
In November 2011, the cost of borrowing in the market began to rise sharply to a level well above the cost of the swap lines. European banks faced a dilemma: borrow dollars at punitive rates in the market, or use Fed swap lines and signal weakness.
The stigma problem: Until late 2011, European banks avoided using Fed swap lines despite their lower cost, fearing market perception of weakness. One possible explanation could be that the cost of borrowing from the swap facility exceeded the cost of borrowing dollars by way of the FX swap market for most banks. Banks may therefore have felt that the market would perceive borrowing from the facility as a sign of financial weakness.
The Response: Fed Swap Lines Reactivated (Again)
May 9, 2010: Fed reestablishes temporary swap lines during initial European debt crisis phase
September 15, 2011: Fed expands swap line terms — Fed, ECB, BOE, BOJ, and SNB announce coordinated action to provide additional dollar liquidity
November 30, 2011: Major coordinated intervention — Six major central banks (Fed, ECB, BOE, BOJ, SNB, BOC) announce:
- Reduction in swap line pricing by 50 basis points
- Extended availability through February 2013
- Coordinated action "to enhance their capacity to provide liquidity support to the global financial system"
December 22, 2011: ECB launches massive LTRO — ECB provides €489 billion to 523 banks for an exceptionally long period of three years at a rate of just one per cent, the biggest infusion of credit into the European banking system in the euro's history
October 31, 2013: THE PERMANENT SOLUTION — Fed announces swap lines with five major central banks become STANDING ARRANGEMENTS (permanent, unlimited, no expiration)
The Fed formalized what 2008 had demonstrated: these five central banks (ECB, BOJ, BOE, SNB, BOC) have permanent, unlimited access to dollar swap lines whenever needed. No congressional approval required. No formal treaty. Just standing authorization.
This was the moment the Eurodollar system's informal architecture became explicit: The Fed is the global lender of last resort for dollar funding, maintaining this role through standing swap arrangements that bypass democratic or legislative oversight.
The Aftermath: Architecture Still Unchanged
Economic Impact:
- European recession (2012-2013)
- Youth unemployment in Southern Europe reached 50%+
- Political instability (rise of populist movements)
- Sovereign debt restructuring (Greece took losses)
The "Solution":
- ECB's "whatever it takes" (Mario Draghi, July 2012) — promise to buy unlimited sovereign bonds
- Banking Union initiatives (partial, incomplete)
- Fed swap lines made permanent — formalizing the global dollar backstop
What Was NOT Reformed:
- European banks' dollar funding model (still dependent on short-term wholesale markets)
- FX swap reliance (synthetic dollar creation continued growing)
- Cross-currency basis deviations (still persistent post-crisis)
- Fundamental Eurodollar architecture (no lender of last resort except Fed)
CRISIS #4: THE SEPTEMBER 2019 REPO CRISIS — OFFSHORE STRESS HITS DOMESTIC MARKETS
The 2019 repo crisis (which we examined in FSA Case Study #001) was a Eurodollar crisis that spilled into U.S. domestic markets—revealing that offshore dollar funding stress can no longer be contained offshore.
The Setup: Regulatory Constraints + Offshore Dollar Demand
By September 2019, U.S. banks faced binding balance sheet constraints from post-2008 regulations (Supplementary Leverage Ratio, LCR). This made them reluctant to expand balance sheets even for low-risk arbitrage.
Meanwhile, offshore dollar funding continued growing, with persistent negative cross-currency basis indicating structural demand for synthetic dollars via FX swaps.
The Trigger: Quarter-End + Treasury Settlement
September 16, 2019: Corporate tax payments ($35B) and Treasury settlement ($70B+) drain reserves from the U.S. banking system
September 17, 2019 (morning): Repo rates spike to 10% — overnight repo rates explode from ~2.4% to 5-10%
The anomaly: Banks sitting on $1.4 trillion in reserves refused to lend even at 10% overnight rates
9:30 AM: Fed announces emergency $75 billion repo operation
The Eurodollar Connection: Why Banks Refused to Arbitrage
U.S. banks' reluctance to lend in repo markets wasn't just about domestic reserves—it was about global dollar funding commitments and regulatory constraints on balance sheet expansion.
Major U.S. banks (JPMorgan, Citi, Bank of America) are primary intermediaries in FX swap markets and correspondent banking for Eurodollar operations. Quarter-end regulatory reporting (SLR calculations) made balance sheet expansion costly. Deploying reserves to repo markets would:
- Expand reported balance sheets (increasing SLR capital requirements)
- Potentially reduce capacity for offshore dollar intermediation
- Risk examiner scrutiny for intraday balance sheet volatility
The architectural insight: The repo crisis revealed that U.S. domestic dollar markets and offshore Eurodollar markets are no longer separate. Regulatory constraints and global dollar intermediation responsibilities mean U.S. banks optimize across both markets simultaneously. Stress in one spills immediately into the other.
The Response: Fed Becomes Permanent Repo Market Participant
September 17-20, 2019: Daily $75 billion repo operations
October 11, 2019: Fed announces:
- $60 billion per month Treasury bill purchases (to increase reserve supply)
- Extended repo operations through at least January 2020
March 2020: Standing Repo Facility (SRF) created — permanent facility for repo market support
What This Revealed:
The 2019 crisis proved that:
- Offshore Eurodollar stress can trigger U.S. domestic market dysfunction
- Post-2008 regulations created new binding constraints on dollar intermediation
- Banks optimize globally, not domestically—U.S. repo markets compete with global dollar commitments for balance sheet space
- The Fed must now support domestic repo markets permanently because banks won't/can't perform this function within regulatory constraints
The architecture revealed: The Eurodollar system and U.S. domestic dollar markets are now a unified, fragile architecture requiring continuous Fed support in both offshore (swap lines) and domestic (repo operations) segments.
CRISIS #5: THE MARCH 2020 COVID PANIC — THE BIGGEST ONE YET
The COVID-19 pandemic triggered the largest, fastest Eurodollar funding crisis yet—and the most massive Fed intervention in history.
The Setup: Global Pandemic Meets Eurodollar Fragility
By early 2020, global dollar funding dependencies had only grown since 2008:
- Offshore dollar debt (on- and off-balance-sheet) had expanded dramatically
- Emerging markets held record dollar-denominated debt
- FX swap markets had grown to $3.2 trillion daily turnover
- Cross-currency basis remained persistently negative (structural stress indicator)
The Trigger: Global Risk-Off + Dollar Scramble
February 24-March 9, 2020: COVID-19 spreads globally; stock markets plunge
March 9-12, 2020: Dollar funding stress emerges — EUR/USD basis widens sharply; dollar strengthens as safe-haven flows surge
March 12, 2020: Treasury market dysfunction — Even U.S. Treasuries (supposedly most liquid, safest assets) see wild price swings as entities sell to raise dollars
March 15-16, 2020: Fed emergency weekend actions:
- Cuts rates to near-zero
- Launches $700 billion QE
- Reactivates emergency lending facilities from 2008
But dollar funding stress continues...
The Cascade: Fastest, Largest Eurodollar Stress Ever
Stage 2-4: The Dollar Scramble Accelerates
EUR/USD basis reached -150 basis points in March 2020—meaning synthetic dollar borrowing via FX swaps was 1.5 percentage points more expensive than direct dollar borrowing. This represented extreme dollar funding stress.
The cascade mechanism:
- Global investors fled risk assets, demanding dollars
- Dollar strengthened sharply (making dollar debts more expensive globally)
- Entities needing dollars to service debts or meet margin calls scrambled for funding
- FX swap markets seized as dealers pulled back
- Asset fire sales hit even Treasury markets (the ultimate safe asset)
- Liquidity dried up across all markets simultaneously
The Response: Unlimited Everything
March 15, 2020: Fed announces enhanced swap line coordination with five standing partners
March 19, 2020: Major swap line expansion — Fed extends temporary swap lines (up to $60 billion each) to nine additional central banks:
- Reserve Bank of Australia
- Banco Central do Brasil
- Danmarks Nationalbank (Denmark)
- Bank of Korea
- Banco de Mexico
- Reserve Bank of New Zealand
- Norges Bank (Norway)
- Monetary Authority of Singapore
- Sveriges Riksbank (Sweden)
March 20, 2020: Daily operations begin — Federal Reserve, ECB, Bank of Japan, Bank of England, Swiss National Bank and Bank of Canada announced an increase in the frequency of the 7-day maturity operations from weekly to daily.
March 31, 2020: Fed creates Foreign and International Monetary Authorities (FIMA) Repo Facility — allows foreign central banks to temporarily exchange Treasuries for dollars (new mechanism beyond swap lines)
| Date | Outstanding Swap Line Draws | Primary Users |
|---|---|---|
| March 25, 2020 | $346 billion | ECB, BOJ |
| April 1, 2020 | $423 billion | ECB, BOJ, BOE |
| May 27, 2020 (Peak) | $449 billion | ECB ($143B), BOJ ($226B) |
For comparison:
- 2008 peak: $583 billion
- 2020 peak: $449 billion
While 2020 peak was slightly lower than 2008, it was reached far faster (weeks vs. months) and required more extensive facility activation (14 central banks with active swap lines vs. peak of ~14 in late 2008, but with broader geographic coverage).
The Aftermath: More Permanent Support Mechanisms
Economic Impact:
- Global GDP contracted ~3.1% (2020) — worst since Great Depression
- Unemployment surged worldwide
- Governments spent trillions on pandemic response and economic support
- Central banks expanded balance sheets dramatically (QE, lending facilities)
The "Solutions":
- Standing Repo Facility (SRF): Permanent domestic repo market support
- FIMA Repo Facility: New mechanism for foreign central banks to access dollar liquidity
- Swap lines extended repeatedly through 2021 before being wound down
- Temporary SLR exemption (April 2020-March 2021): Excluded Treasuries and reserves from leverage ratio calculations to encourage intermediation
What Was NOT Reformed (Again):
- Offshore dollar funding architecture (still no formal lender of last resort except Fed)
- FX swap market structure (synthetic dollar creation continued post-crisis)
- Cross-currency basis deviations (persist to present day)
- Regulatory constraints on bank intermediation (SLR temporary relief expired March 2021, constraints returned)
THE SYNTHESIS: WHY THE PATTERN CANNOT BREAK
Five Crises, 23 Years, Same Architecture
We have now documented five major Eurodollar crises spanning 23 years:
| Crisis | Trigger | Cascade | Response | Reform? |
|---|---|---|---|---|
| 1997 Asia | Currency pegs break | Regional dollar scramble | IMF packages | No |
| 2008 GFC | Subprime collapse | European banks' dollar run | Fed swap lines (unlimited) | No |
| 2011 Europe | Sovereign debt crisis | MMF withdrawal from EU banks | Swap lines made permanent | No |
| 2019 Repo | Quarter-end + reserves drain | Spillover to domestic markets | Standing Repo Facility | No |
| 2020 COVID | Global pandemic risk-off | Fastest cascade ever | Daily swaps, FIMA facility | No |
The pattern is undeniable:
- Triggers vary (currency crisis, credit crisis, pandemic), but the cascade mechanism is identical
- Same vulnerabilities exploited every time: synthetic dollar leverage, maturity mismatch, no lender of last resort
- Same Fed response every time: emergency liquidity provision, then permanent support mechanisms
- Zero structural reform in 23 years—the architecture that caused 1997 caused 2020
Why Reform Is Impossible
The architecture persists because it serves too many powerful interests:
1. U.S. Banks: Profit from intermediating global dollars without reserve requirements or deposit insurance costs. Implicit Fed backstop reduces risk.
2. U.S. Government: Dollar hegemony extends US influence globally. Sanctions architecture depends on dollar dominance. Treasury market supported by foreign dollar holders. Fed's global role enhances US power.
3. Foreign Governments: Access to dollar funding for their banks and economies without formal dependence on US institutions (though informal dependence on Fed).
4. International Banks: Earn spreads intermediating dollars. Can operate with higher leverage offshore than onshore.
5. Host Jurisdictions (London, Singapore, Hong Kong): Financial industry employment and tax revenue. Global financial center status.
6. Institutional Investors: Access to global dollar assets and synthetic dollar exposure through FX swaps.
The Doom Loop: Moral Hazard Compounds Fragility
Each Fed intervention creates expectations of future intervention. This encourages more offshore dollar activity, more leverage, more risk-taking—making the next crisis larger and requiring even more Fed support.
The Moral Hazard Spiral:
- Eurodollar system operates knowing Fed will intervene if crisis emerges
- This implicit backstop encourages riskier offshore dollar activities and higher leverage
- Increased offshore dollar activity makes system more fragile and interconnected
- Next crisis requires larger Fed intervention to prevent collapse
- Larger intervention reinforces expectations of future support
- Return to step 1, repeat with higher stakes
Evidence of compounding fragility:
- Crisis frequency: 1997 → 2008 (11 years) → 2011 (3 years) → 2019 (8 years) → 2020 (1 year)
- Speed of cascade: 1997 took months; 2020 took days
- Intervention scale: 1997 IMF packages in tens of billions; 2020 Fed facilities in hundreds of billions, daily operations
- Permanent mechanisms: Each crisis adds new permanent Fed support (standing swap lines 2013, Standing Repo Facility 2021, FIMA Repo Facility 2020)
The Architectural Truth
The Eurodollar system cannot be reformed because reform would require acknowledging that:
- Dollar hegemony depends on architectural fragility. The system that extends US power globally is the same system that requires repeated Fed bailouts. ```
- The Fed has become global lender of last resort without democratic accountability. Congress never voted to make the Fed responsible for global dollar stability, yet that's what happened through successive crises.
- Regulatory arbitrage (the system's origin) remains its defining feature. Banks operate offshore precisely to avoid oversight—eliminating this would destroy the system's raison d'être.
- Beneficiaries are too powerful. US banks, foreign governments, international financial centers, and the US government itself all benefit from current architecture despite its fragility.
- Any viable alternative requires surrendering dollar dominance or accepting formal global lender-of-last-resort obligations. Neither is politically acceptable in the US. ```
What "Solutions" Actually Accomplish
After each crisis, "solutions" preserve the architecture rather than reform it:
- Standing swap lines (2013): Formalize Fed's role as global dollar backstop, encouraging more offshore dollar activity
- Standing Repo Facility (2021): Fed becomes permanent participant in domestic repo markets, subsidizing bank intermediation
- FIMA Repo Facility (2020): Create new mechanism for foreign central banks to access dollars, expanding Fed's global role
- Basel III regulations (post-2008): Increased bank capital requirements but created new binding constraints (SLR) that paradoxically reduced market-making capacity during stress
These are not reforms—they are architectural expansions of Fed support. Each crisis leads to more Fed involvement, not less; more permanent mechanisms, not structural change; more moral hazard, not less.
The Inevitable Next Crisis
Based on architectural analysis of five previous crises, we can predict with confidence:
The next Eurodollar crisis will:
- Follow the same six-stage cascade (different trigger, same mechanism)
- Happen faster than 2020 (interconnection and leverage continue growing)
- Require larger Fed intervention (moral hazard has encouraged more risk-taking)
- Hit when least expected (but structurally inevitable)
- Result in more permanent Fed facilities (not structural reform)
Potential triggers (Part 3 will examine these in detail):
- Fed policy tightening while other central banks stay loose (interest rate differential stress)
- Emerging market debt crisis (record dollar-denominated debt held by EMs)
- China/Japan financial stress (major Eurodollar participants)
- Geopolitical shock (war, sanctions escalation)
- Unexpected regulatory change affecting bank balance sheets
CONCLUSION: THE PATTERN IS THE ARCHITECTURE
Over two parts (2A and 2B), we have documented five Eurodollar crises spanning 23 years. Every crisis followed the same pattern because they're all manifestations of the same architectural fragility:
- Offshore dollar funding without lender of last resort
- Synthetic dollar creation via FX swaps (hidden, off-balance-sheet leverage)
- Maturity mismatch requiring continuous rollover of short-term funding
- Market segmentation preventing efficient capital reallocation
- Correspondent banking concentration creating systemic chokepoints
These vulnerabilities were embedded in the system's origins (Part 1) and have caused repeated crises (Part 2). Each "solution" preserved the architecture rather than reformed it, because the architecture serves too many powerful interests to be fundamentally changed.
The Fed has become the de facto global lender of last resort—not through formal treaty or legislative action, but through repeated emergency interventions that created expectations of permanent support. This moral hazard encourages continued offshore dollar activity, leverage, and risk-taking, making each successive crisis larger and faster.
The pattern cannot break without one of two outcomes:
- Formal architecture: Explicit agreement making the Fed the global lender of last resort with appropriate oversight and burden-sharing (politically impossible)
- Catastrophic failure: A crisis large enough that Fed intervention is insufficient or politically unacceptable, forcing system collapse and restructuring
Option 1 requires surrendering sovereignty or accepting obligations that no US administration will embrace. Option 2 would be economically catastrophic but may eventually be inevitable if the doom loop continues.
In Part 3, we examine current vulnerabilities and stress points in the Eurodollar system as it exists today—revealing what might trigger the next crisis and why the architecture is more fragile now than in 2020.
Part 3: Current Vulnerabilities
Where is the Eurodollar system fragile right now? What are the warning signs? What could trigger the next crisis? And why is the architecture even more stressed today than during COVID?
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