The European Central Bank (ECB) recently unveiled a plan to expand access to its "repo line" for central banks worldwide, making this instrument a permanent and globally applicable mechanism.

The repo line is utilized during times of stress when central banks face difficulty raising funds in the market. This facility enables them to borrow euros from the ECB by pledging high-quality assets, with repayment including interest upon maturity.

Unlike previous mechanisms that required periodic renewal, this new framework offers permanent access to repo transactions with a limit of up to 50 billion euro. The repo line will take effect from Q3/2026, provided that borrowing partners are not excluded for reputational reasons, such as money laundering, terrorist financing, or violations of international sanctions.

50 euro banknotes photographed on 30/5/2022. Photo: Reuters.

50 euro banknotes photographed on 30/5/2022. Photo: Reuters.

Previously, this mechanism was limited to a few countries, primarily in Eastern Europe. However, ECB President Christine Lagarde has long viewed it as an instrument to expand the euro's global influence. Ensuring access to euros is expected to boost demand for euro-denominated assets. Concurrently, it encourages banks outside the 21 eurozone countries to purchase assets from the bloc.

"Having a 'lender of last resort' for central banks globally will increase confidence in investing, borrowing, and trading in euros. This ensures that liquidity will always be available during market volatility", she stated.

Furthermore, as investors re-evaluate the US dollar's position due to the unpredictability of US President Donald Trump's economic policies, Lagarde believes this is an opportune moment for the euro to increase its market share.

Currently, the US Federal Reserve (Fed) also maintains an instrument similar to the ECB's "repo line". It is called the FIMA Repo Facility, with the primary objective of safeguarding the US Treasury bond market. Accordingly, when institutions urgently need US dollars, they can use this mechanism to borrow US dollars by pledging US Treasury bonds, instead of selling them off. Upon maturity, the borrower repays the US dollars with interest and receives the bonds back.

By Phien An (according to Reuters)