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The Federal Reserve gave out over “$3 trillion in loans and asset purchases” in the last few weeks as a measure to prevent the “U.S. financial system from seizing up”. However, till now the Fed has not shown its support to municipalities, companies as well as borrowers with “less than perfect credit”. The part reason behind this is due to the fact that the central bank of America does not have the clearance to “take much credit risk” while lower rated burrowers bring with them “higher” loss risks.
At present, the risk seems to worsen with the efforts of containing the outbreak of coronavirus which almost halted economic activities. In an attempt to absorb some of the loss shocks, the U.S. Treasury has “taken on some of the risk that Fed loans will not be paid back”. According to Reuters report:
“It has contributed about $50 billion from a pool of money called the Exchange Stabilization Fund. That money will be used to absorb losses from Fed loans that go bad. Assuming only a fraction of loans will default, the Treasury contribution has allowed the Fed to lend much more without taking on additional risk”.
Moreover, last Friday, the Treasury received nearly “$450 billion” from the Congress as a portion of the “$2.2 trillion U.S. stimulus package”. The said receipt has “greatly” increased its capacity to help the economy. According to the Secretary of the Treasury, Steven Mnuchin, the additional funds could be used to “provide about $4 trillion in loans” through the Treasury and the Fed.
Nevertheless, economists as well as the investors are of the opinion that the above mentioned additional amount would be “insufficient” while the Congress will have to pull up “trillions of dollars” for the Treasury and the Fed to affect the real economy. In case, the Congress fails to do so, the companies and the “local governments” alike will be “at risk of defaulting on debt or even going under”.
References:
reuters.com
At present, the risk seems to worsen with the efforts of containing the outbreak of coronavirus which almost halted economic activities. In an attempt to absorb some of the loss shocks, the U.S. Treasury has “taken on some of the risk that Fed loans will not be paid back”. According to Reuters report:
“It has contributed about $50 billion from a pool of money called the Exchange Stabilization Fund. That money will be used to absorb losses from Fed loans that go bad. Assuming only a fraction of loans will default, the Treasury contribution has allowed the Fed to lend much more without taking on additional risk”.
Moreover, last Friday, the Treasury received nearly “$450 billion” from the Congress as a portion of the “$2.2 trillion U.S. stimulus package”. The said receipt has “greatly” increased its capacity to help the economy. According to the Secretary of the Treasury, Steven Mnuchin, the additional funds could be used to “provide about $4 trillion in loans” through the Treasury and the Fed.
Nevertheless, economists as well as the investors are of the opinion that the above mentioned additional amount would be “insufficient” while the Congress will have to pull up “trillions of dollars” for the Treasury and the Fed to affect the real economy. In case, the Congress fails to do so, the companies and the “local governments” alike will be “at risk of defaulting on debt or even going under”.
References:
reuters.com
