Will the swap market get all tangled up tomorrow?

March 26, 2009

42-18122069I am hearing that US authorities froze some accounts used by local brokers in the swap market in the US today and that at least three dozen brokers may be involved. The amount of money frozen may be in the hundred millions and clearly nobody knows how long the process may last.

What this means is that in the upcoming days, the swap market may become all tangled up, soaring one day, down the next or whatever, as many of these brokers appear to be some of those PDVSA sells foreign currency directly to. This means that a lot of the settlements in this market will not take place and there will be defaults all over the place, possibly creating a sort of domino effect.

As brokers default, the market is likely to become somewhat dysfunctional, as PDVSA will also have trouble supplying the market with foreign currency. Note that at the same time, PDVSA itself will be affected as some brokers may not receive their payment in Bolivars, when they do not deliver the foreign currency and thus PDVSA will not be paid either.

So, prepare for a few wild days in the swap market…

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