Asian central banks patrol as credit fears rise
Friday, 17 August 2007
SINGAPORE, Aug 16 (Reuters): Asia Pacific central banks and financial chiefs kept a tight watch on money markets and attempted to reassure investors Thursday as fears of a worsening global credit storm gripped the region.
"There's a degree of panic over the uncertainty induced by the subprime sector in the United States," said PK Basu, Singapore-based chief economist for Asia ex-Japan at Daiwa.
"The economic fundamentals in Asia are very sound. However, the final residing place of these CDOs (collateralised debt obligations) and the derivatives issued on the subprime mortgages is difficult to predict."
US Treasury Secretary Henry Paulson was quoted as saying that the turmoil would exact a penalty on growth in the United States but that the financial system and the economy were strong enough to withstand it without suffering a recession.
Paulson told the Wall Street Journal in an interview published Thursday that nothing should be done to protect market players against losses or restrain their risk-taking.
"One of the natural consequences of the excesses is that some entities will cease to exist," he said.
The recent problems started when banks repackaged and resold risky subprime loans in the form of CDOs and other instruments to banks and funds around the world. As demand for the securities dried up, these banks and funds were unable to sell and had to mark down the value of their holdings.
That in turn spooked investors and caused credit markets worldwide to tighten. Central banks reacted by pouring cash into money markets to smooth out trading.
The Financial Times reported Thursday that the European Commission would investigate rating agencies for what officials in Brussels saw as their failure to warn investors about the unfolding risks attached to securities backed by subprime loans.
Asian stock markets remained under pressure Thursday, with Japan's Nikkei reaching 8-1/2-month lows. The yen rose to a near five-month high against the dollar and euro as investors unwound carry trades.
Australia's central bank added a larger-than-usual amount to the banking system Thursday, which analysts took as an attempt to ease upward pressure on market interest rates. Australian Treasurer Peter Costello said the Australian banking sector was well capitalised and had sufficient liquidity.
South Korean Vice Finance Minister Kim Seok-dong said the government would collaborate with the central bank to inject funds into money markets on any signs of a squeeze.
The Reserve Bank of New Zealand said it was closely monitoring markets but believed the level of cash within the banking system was adequate.
Earlier, St Louis Federal Reserve Bank President William Poole said that financial market turmoil had not undermined the US economy and there was no need for the central bank to ride to the rescue with an emergency rate cut.
The low-interest-rate yen has been widely used by speculators as a cheap source of funds to buy higher-yielding and often riskier assets in other currencies.
As those trades were unwound, the Australian dollar briefly fell below US$0.80 for the first time since March and the New Zealand dollar dropped more than 3.5 per cent from the day's high to around US$0.6830.
Other Asian currencies extended recent losses and central banks in Indonesia, Malaysia and the Philippines were reported to have stepped into the market to support their currencies.
In the latest scare for already jittery investors, a Merrill Lynch analyst flagged the possibility that Countrywide Financial (CFC.N), the largest US mortgage lender, could face bankruptcy if liquidity conditions worsened. North America's monetary authorities reopened the taps Wednesday. The US Federal Reserve added $7 billion in temporary reserves as losses in the US subprime mortgage market sent Wall Street stocks slumping again. The Bank of Canada stepped in after a day on the sidelines, injecting C$350 million ($330 million).
The Reserve Bank of Australia (RBA) picked up the baton in its regular daily money market operation Thursday, adding A$3.04 billion ($2.5 billion) in cash to the banking system, above the A$2.5 billion estimated requirement.
"What's interesting is that they've added a generous amount, they're concentrating on money market debt and they've lent at rates below what the market was charging," said Matthew Johnson, senior economist at broker ICAP.
Investors are increasingly betting that central banks will have to do more than supply markets with overnight cash. Futures markets are pricing in a higher possibility of a Fed rate cut.
"The central banks are actually very well positioned to do a fair bit, given that real interest rates are quite high around the world because central banks were tightening in anticipation of stronger growth ahead," said Daiwa's Basu.
"There's a degree of panic over the uncertainty induced by the subprime sector in the United States," said PK Basu, Singapore-based chief economist for Asia ex-Japan at Daiwa.
"The economic fundamentals in Asia are very sound. However, the final residing place of these CDOs (collateralised debt obligations) and the derivatives issued on the subprime mortgages is difficult to predict."
US Treasury Secretary Henry Paulson was quoted as saying that the turmoil would exact a penalty on growth in the United States but that the financial system and the economy were strong enough to withstand it without suffering a recession.
Paulson told the Wall Street Journal in an interview published Thursday that nothing should be done to protect market players against losses or restrain their risk-taking.
"One of the natural consequences of the excesses is that some entities will cease to exist," he said.
The recent problems started when banks repackaged and resold risky subprime loans in the form of CDOs and other instruments to banks and funds around the world. As demand for the securities dried up, these banks and funds were unable to sell and had to mark down the value of their holdings.
That in turn spooked investors and caused credit markets worldwide to tighten. Central banks reacted by pouring cash into money markets to smooth out trading.
The Financial Times reported Thursday that the European Commission would investigate rating agencies for what officials in Brussels saw as their failure to warn investors about the unfolding risks attached to securities backed by subprime loans.
Asian stock markets remained under pressure Thursday, with Japan's Nikkei reaching 8-1/2-month lows. The yen rose to a near five-month high against the dollar and euro as investors unwound carry trades.
Australia's central bank added a larger-than-usual amount to the banking system Thursday, which analysts took as an attempt to ease upward pressure on market interest rates. Australian Treasurer Peter Costello said the Australian banking sector was well capitalised and had sufficient liquidity.
South Korean Vice Finance Minister Kim Seok-dong said the government would collaborate with the central bank to inject funds into money markets on any signs of a squeeze.
The Reserve Bank of New Zealand said it was closely monitoring markets but believed the level of cash within the banking system was adequate.
Earlier, St Louis Federal Reserve Bank President William Poole said that financial market turmoil had not undermined the US economy and there was no need for the central bank to ride to the rescue with an emergency rate cut.
The low-interest-rate yen has been widely used by speculators as a cheap source of funds to buy higher-yielding and often riskier assets in other currencies.
As those trades were unwound, the Australian dollar briefly fell below US$0.80 for the first time since March and the New Zealand dollar dropped more than 3.5 per cent from the day's high to around US$0.6830.
Other Asian currencies extended recent losses and central banks in Indonesia, Malaysia and the Philippines were reported to have stepped into the market to support their currencies.
In the latest scare for already jittery investors, a Merrill Lynch analyst flagged the possibility that Countrywide Financial (CFC.N), the largest US mortgage lender, could face bankruptcy if liquidity conditions worsened. North America's monetary authorities reopened the taps Wednesday. The US Federal Reserve added $7 billion in temporary reserves as losses in the US subprime mortgage market sent Wall Street stocks slumping again. The Bank of Canada stepped in after a day on the sidelines, injecting C$350 million ($330 million).
The Reserve Bank of Australia (RBA) picked up the baton in its regular daily money market operation Thursday, adding A$3.04 billion ($2.5 billion) in cash to the banking system, above the A$2.5 billion estimated requirement.
"What's interesting is that they've added a generous amount, they're concentrating on money market debt and they've lent at rates below what the market was charging," said Matthew Johnson, senior economist at broker ICAP.
Investors are increasingly betting that central banks will have to do more than supply markets with overnight cash. Futures markets are pricing in a higher possibility of a Fed rate cut.
"The central banks are actually very well positioned to do a fair bit, given that real interest rates are quite high around the world because central banks were tightening in anticipation of stronger growth ahead," said Daiwa's Basu.