Preparing for politicised dollar liquidity
The time to act is now
Heidi Crebo-Rediker and Douglas Rediker
Heidi Crebo-Rediker is a Senior Fellow at the Council on Foreign Relations and previously served as Chief Economist at the State Department.
Douglas Rediker is Managing Partner at International Capital Strategies, Non-Resident Senior Fellow at the Brookings Institution, and previously represented the United States on the Executive Board of the IMF.
As finance ministers and central bankers gather in Washington DC for the IMF and World Bank Annual Meetings, recent events suggest the IMF would do well to look past narrower debates and revisit its original purpose: ensuring global monetary co-operation and financial stability.
A pressing question, no longer just whispered in official circles, is how the international system would cope if the US Federal Reserve — its independence under fire and subject to political pressure — were less willing, or less able, to provide dollar liquidity in a crisis.
When a “swap” isn’t a swap, it’s a political signal
The Trump administration’s announcement of US financial support to Argentina illustrates a related concern.
President Trump and Treasury secretary Scott Bessent have described the arrangement as a “swap.”
But in fact, while details remain scarce, what Treasury is likely to offer Argentina is not a “swap” at all, but rather a loan from the Exchange Stabilization Fund (ESF).
Central banks extend swap lines to one another; finance ministries do not.
The distinction matters.
Swap lines are meant to provide rapid, depoliticised liquidity to stabilise global markets.
By contrast, the ESF is a discretionary fiscal tool, putting taxpayer funds at risk.
The rationale for deploying it in Argentina’s case has been unusual: Secretary Bessent said that US financial support for Argentina would serve as “a bridge to the [midterm] election” in order to improve Argentina’s President Javier Milei’s political fortunes, following his party’s underperformance in recent regional elections.
This was not the unanticipated external shock Secretary Bessent warned earlier this year could catalyse a Treasury response, nor is it a systemic crisis threatening US financial stability that would be consistent with past uses of the ESF.
This sets a precedent: the politicisation of US financial firepower to reward friends abroad.
Combined with Trump’s explicit efforts to bend the Federal Reserve itself to political ends, the episode raises the possibility that the Fed’s own swap lines, pillars of the global system, could be politicised, not only to reward friends, but perhaps to be used as leverage for other reasons.
The Fed’s quiet backstop — and its fragility
For decades, the Fed’s dollar swap lines have been a quiet but critical stabiliser.
During the global financial crisis, the euro crisis, and again in 2020 during the COVID-19 pandemic, the Fed extended hundreds of billions in liquidity to foreign central banks.
As recently as 2023, tens of billions were provided to the Swiss National Bank to backstop Credit Suisse withdrawals.
These actions prevented disorderly collapses and reassured markets that dollar funding would remain available.
Six central banks — the Fed, ECB, Bank of England, Bank of Japan, Bank of Canada, and Swiss National Bank — maintain standing swap arrangements.
Others, from Korea to Mexico to Singapore, have at times been granted temporary access.
But these are discretionary. Extending or withholding them is always a matter of policy choice.
That reality is now drawing sharper scrutiny.
Officials in Europe and Asia increasingly question whether the Fed’s backstop can still be taken for granted in the face of US political cycles.
With Trump linking economic and security tools to extract concessions from allies and adversaries alike, the leverage inherent in swap line access is hard to miss.
What if the Fed says no?
The question is not academic.
Imagine a strong economy with solid fundamentals hit by a sudden liquidity shock.
Under current norms, the Fed would likely provide a dollar swap line.
But what if the White House pressures the Fed to say no, either to punish an unfriendly government or to extract concessions on trade, security, or other issues?
Alternatives would be limited.
Other central banks could provide swaps in euros or yen, but the world’s dominant reserve currency is still the dollar.
Finance ministries could provide bilateral credit through fiscal channels, but those would likely be too slow, too conditional, and would not likely be denominated in dollars.
That leaves the IMF.
Over the past 15 years, the Fund has developed a set of instruments designed to serve as a financial safety net.
The Short-Term Liquidity Line (SLL) is the closest thing to a swap line: available to countries with strong fundamentals, with no ex post conditionality.
But the scale is capped — 145 per cent of quota, extendable to 290 per cent.
For many economies, that is too small to reassure markets in a major shock scenario.
Strengthening the IMF’s role
The best way to make the SLL, and indeed the IMF’s broader toolkit, credible is to increase IMF quotas.
Under an agreement struck in 2024, the US backed a quota increase offset by a reduction in the Fund’s New Arrangements to Borrow, leaving total US commitments unchanged but boosting the base against which quota-linked facilities like the SLL are calculated.
That deal still requires US congressional approval.
If enacted, it would immediately expand the Fund’s capacity to act quickly and at scale when needed.
Why it matters now
The Treasury’s decision to offer a “swap” in Argentina is really a signal that Washington is willing to wield its financial tools for political purposes in ways that depart from past norms.
If that approach extends to the Fed itself, the consequences for global stability could be profound.
For decades, the Fed’s swap lines have underpinned confidence in the global system.
If they become hostage to presidential whims, countries cannot count on dollar liquidity when it matters most.
In that scenario, the IMF must be ready to provide its next-best substitute.
To do so, it needs the resources — through increased quotas — to ensure that liquidity shocks do not spiral into solvency crises.
The credibility of the system rests not on assuming the Fed will always be there, but on preparing complementary options before the next crisis arrives.
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