Starting from June 3, 2009 the NBG will launch a new instrument – foreign exchange SWAP facility. The introduction of the new instrument will broaden the monetary policy toolkit of the NBG, help the country to attract additional foreign capital inflows from abroad, allow banks to increase lending in domestic currency, take away foreign currency exposure risk from borrowers and encourage dedolarization of the economy.

Following recent changes related to FX market activity, featuring introduction of FX auctions and suspension of interventions on TICEX, NBG has decided to launch a new instrument in the first week of June, to add to its already existing set of monetary tools. FX swap is a monetary policy instrument and it does not have any direct link with NBG’s exchange rate policy. FX swaps will allow NBG to provide liquidity to the banking system in an environment where use of government securities as collateral for classical monetary operations is limited.

FX swaps will have one year maturity, hence banks will be able to use lari resources obtained through this facility for lending in domestic currency. This way they will meet increased demand for domestic currency lending. Consequently the borrowers will not be exposed to exchange rate risk. In a related move FSA will amend its regulation on open currency position to allow banks using swaps in the interbank market. On foreign currency leg side some of existing US dollar loans will be replaced by lari denominated loans while some banks will attract new funding from abroad. Hence the introduction of swaps should facilitate dedollarization of loans and improve transmission mechanism of monetary policy, making NBG more effective in pursuing its objective of price stability.

FX Swap is essentially a combination of two loans in different currencies. With FX swaps NBG will lend domestic currency to local banks and will borrow foreign currency. At spot settlement date NBG will receive US dollars and lend out lari equivalent at current market rate. At the maturity of the swap contract NBG will return US dollars and receive back lari, plus interest earned. FX Swap’s pricing depends on three main variables: spot or current market exchange rate, interest rate in foreign currency (US dollars) and interest rate in domestic currency. Spot rate and interest rate for US dollars are fixed for the auction, while banks bid with their interest rates for lari loans.

NBG will hold Swap auctions once in a week, on Wednesday. Banks will submit their bids using Bloomberg system, likewise they do for FX auctions. Auctions will be multiple price. NBG will not set limits on interest rates. The interest rate therefore will be market determined. It will not be linked to NBG’s policy rate which is currently set at 6%.