Central banks join in massive global rescue plan
Saturday, 15 December 2007
A massive rescue effort by five central banks to inject fresh money into the worldwide banking system aims to help the global economy weather the impact of a potentially crippling credit squeeze, analysts said.
The Federal Reserve and four other central banks announced the initiative yesterday including a new system of loan auctions to help commercial banks access cash, and a swap of credit lines to help provide needed dollars to global banks.
The joint effort with the Bank of Canada, Bank of England, European Central Bank and the Swiss National Bank is "designed to address elevated pressures in short-term funding markets," the US central bank said in a statement.
"This is the biggest act of global economic cooperation since September 11," 2001, said Sherry Cooper, chief economist at BMO Capital Markets in Toronto.
Cooper said the entire global banking system has been under stress with lenders "desperate for funds to replenish their capital drawn down by enormous write-downs related to mortgage- linked securities."
The move comes amid concerns about a widening credit crunch in which commercial banks are curbing lending even to other banks, raising concerns of a retrenchment that will crimp global economic growth.
The effort creates a temporary short-term auction system to allow commercial banks another avenue to obtain funding. The first auction of 20 billion dollars will be held Monday by the Fed with an additional 20 billion dollars made available on December 20.
The Fed said the effort offered a new way to inject money into the banking system following a series of steps since the credit crisis erupted in August.
The Fed also announced temporary currency swap lines with the European Central Bank and the Swiss National Bank. These will provide up to 20 billion dollars to the ECB and four billion dollars to the Swiss central bank for up to six months.
The actions "could help promote the efficient dissemination of liquidity when the unsecured interbank markets are under stress," the Fed said.
Brian Bethune, economist at Global Insight, said he was "surprised that the central banks waited so long" to implement the plan of action.
Bethune added that the plan "was designed to stave off continued tightening of credit and liquidity conditions in the worldwide interbank markets."
One major concern for markets had been a sharp rise in the LIBOR rate-the London interbank rate used for much interbank lending. The rise suggested banks were curbing lending and were short of cash needed for these loans.
Bethune said the upward pressure on LIBOR rates "is problematic for the sustainability of the economic expansion, since the LIBOR interbank rate is widely used as a benchmark for floating rate borrowing, including adjustable rate mortgages and short-term corporate and commercial borrowing lines."
Lee Hardman, an economist at Bank of Tokyo-Mitsubishi Ltd in London, said central banks were clearly worried about financial market turmoil even after a series of rate cuts by the Federal Reserve and other efforts by central banks to keep credit flowing.
"The timing of the announcement suggests that there was increasing concerns over liquidity over the turn of the year," Hardman said.
"These actions will clearly diminish the risk of further financial turmoil through to year-end. However, these actions will not alleviate the uncertainty that has been created by the losses suffered by the decline in value of mortgage related securities."
He said potential losses are estimated to be 300 to 400 billion dollars but that "to date, only approximately one-third of that total has been reported.
"Hence, the willingness of financial institutions to lend to each other is likely to remain muted," he added.
Cooper said the action came amid "concerns that banks will continue to reduce lending, potentially sending the US economy into recession and hobbling growth in the rest of the world.
"These actions will help to alleviate the credit squeeze and put banks ... back on a firmer footing," she said.
"Clearly, the central banks realized the severity of the situation and are taking on their most important role-to assure the efficient functioning of the world's financial markets." — AFP
The Federal Reserve and four other central banks announced the initiative yesterday including a new system of loan auctions to help commercial banks access cash, and a swap of credit lines to help provide needed dollars to global banks.
The joint effort with the Bank of Canada, Bank of England, European Central Bank and the Swiss National Bank is "designed to address elevated pressures in short-term funding markets," the US central bank said in a statement.
"This is the biggest act of global economic cooperation since September 11," 2001, said Sherry Cooper, chief economist at BMO Capital Markets in Toronto.
Cooper said the entire global banking system has been under stress with lenders "desperate for funds to replenish their capital drawn down by enormous write-downs related to mortgage- linked securities."
The move comes amid concerns about a widening credit crunch in which commercial banks are curbing lending even to other banks, raising concerns of a retrenchment that will crimp global economic growth.
The effort creates a temporary short-term auction system to allow commercial banks another avenue to obtain funding. The first auction of 20 billion dollars will be held Monday by the Fed with an additional 20 billion dollars made available on December 20.
The Fed said the effort offered a new way to inject money into the banking system following a series of steps since the credit crisis erupted in August.
The Fed also announced temporary currency swap lines with the European Central Bank and the Swiss National Bank. These will provide up to 20 billion dollars to the ECB and four billion dollars to the Swiss central bank for up to six months.
The actions "could help promote the efficient dissemination of liquidity when the unsecured interbank markets are under stress," the Fed said.
Brian Bethune, economist at Global Insight, said he was "surprised that the central banks waited so long" to implement the plan of action.
Bethune added that the plan "was designed to stave off continued tightening of credit and liquidity conditions in the worldwide interbank markets."
One major concern for markets had been a sharp rise in the LIBOR rate-the London interbank rate used for much interbank lending. The rise suggested banks were curbing lending and were short of cash needed for these loans.
Bethune said the upward pressure on LIBOR rates "is problematic for the sustainability of the economic expansion, since the LIBOR interbank rate is widely used as a benchmark for floating rate borrowing, including adjustable rate mortgages and short-term corporate and commercial borrowing lines."
Lee Hardman, an economist at Bank of Tokyo-Mitsubishi Ltd in London, said central banks were clearly worried about financial market turmoil even after a series of rate cuts by the Federal Reserve and other efforts by central banks to keep credit flowing.
"The timing of the announcement suggests that there was increasing concerns over liquidity over the turn of the year," Hardman said.
"These actions will clearly diminish the risk of further financial turmoil through to year-end. However, these actions will not alleviate the uncertainty that has been created by the losses suffered by the decline in value of mortgage related securities."
He said potential losses are estimated to be 300 to 400 billion dollars but that "to date, only approximately one-third of that total has been reported.
"Hence, the willingness of financial institutions to lend to each other is likely to remain muted," he added.
Cooper said the action came amid "concerns that banks will continue to reduce lending, potentially sending the US economy into recession and hobbling growth in the rest of the world.
"These actions will help to alleviate the credit squeeze and put banks ... back on a firmer footing," she said.
"Clearly, the central banks realized the severity of the situation and are taking on their most important role-to assure the efficient functioning of the world's financial markets." — AFP