SWIFT Ban Means the Fed May Need to Be Ready With Dollars

(Bloomberg) — The decision to exclude various Russian lenders from the SWIFT messaging system could result in missed payments and giant overdrafts within the international banking system and spur monetary authorities to reactivate daily operations to supply the market with dollars.

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That’s the view of prominent Credit Suisse Group AG strategist Zoltan Pozsar, who published a note Sunday examining the consequences for money markets of the decision to take some lenders off SWIFT, a system that facilitates international payments between institutions.

Drawing comparisons with the 2008 Lehman Brothers Holdings Inc. failure and the pandemic-related market seizures of March 2020, Pozsar warns that “central banks should stand ready to make markets on Monday again.”

“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,” Pozsar wrote. “Banks’ inability to make payments due to their exclusion from SWIFT is the same as Lehman’s inability to make payments due to its clearing bank’s unwillingness to send payments on its behalf. History does not repeat itself, but it rhymes.”

In Pozsar’s view, current excess reserves and reverse repurchase agreement facilities won’t be enough, and monetary authorities will need to act. And the upshot from that is that the Federal Reserve, which has been paving the way to start shrinking its balance sheet through so-called quantitative tightening, might actually expand it again first, according to Pozsar.