SWIFT sanctions = Lehman crisis? Wall Street shouts Fed 'Bailout'

With the SWIFT sanctions against Russia, the European and American banking systems will also face unprecedented pressure.

Over the weekend, Credit Suisse repo and money channel expert Zoltan Pozsar argued in a new report:

Mr Pozsar points out that Russia is a "surplus agent" - an entity that normally lends a lot of money in the Eurodollar market. Russian banks have more than $450 billion in non-gold foreign exchange reserves and the private sector has more than $500 billion in liquid investments.

According to the bank of Russia's latest foreign Exchange and Gold Asset Management report, usd assets accounted for around 20% of Russia's non-gold foreign exchange reserves at the end of June 2021, compared to 50% at the end of March 2018.

Of Russia's nearly $1tn in liquid assets, more than $300bn is in short-term money market instruments. $300bn in money markets is a lot of money, big enough to push spreads. Pozsar warns:

"In extreme cases, $300bn could either be trapped by sanctions or somehow moved from west to east to avoid being trapped by sanctions."

"Everything is going to be a market event."

Pozsar argues that if funds are frozen through sanctions, turning surplus agents (Russia) into deficit agents and resulting in delinquent payments, then the market will discount the overnight freezing of trillions of dollars in short-term funding markets.

This would mean a partial "tearing up" of corresponding foreign exchange swap accounts and an outflow of deposits from western banks, which may then have to draw on dollar swap lines.

And the decision to exclude a number of Russian banks from the SWIFT messaging system could lead to late payments and huge overdrafts within the international banking system in what would surely be another Lehman Brothers equivalent.

Pozsar notes: "The failure of a bank to pay because it was excluded from SWIFT is the same as the failure of Lehman Brothers to pay because its clearing bank would not pay on its behalf. History will not repeat itself, but it will be similar."

This would therefore stimulate the monetary authorities to restart their day-to-day operations and supply the market with dollars.

In Pozsar's view, the war in Ukraine seems to have turned into another fed balance sheet expansion crisis, just like the coronavirus pandemic -- the Fed's balance sheet could expand again before it shrinks -- and not just because of swap lines.