Global banking system remains broken
Peter Ryan | Saturday, 7 March 2009
Today's dramatic action by the Bank of England underlines the worsening nature of the global financial crisis as credit markets remain frozen.
The bank has dropped interest rates to 0.5 per cent and announced that it will create another 75 billion pounds ($166 billion) to tackle the UK's deep recession.
Put simply, the global banking system remains broken and little has changed since September last year when the Lehman Brothers collapse set the dominoes falling on Wall Street
That's when the credit crunch exploded into the global financial crisis.
Even though key measure of interbank lending risk (the three month US dollar LIBOR rate) has fallen dramatically from September's high of 4.8 per cent to 1.28 per cent, fear and suspicion is paramount.
This week's reality check is the teetering state of the world's biggest insurer American International Group which posted the biggest quarterly loss in American corporate history.
AIG is regarded as "too big to fail" and this week the chairman of the US Federal Reserve Ben Bernanke acknowledged the collapse of the insurer would effectively crack the bedrock of the financial system.
While AIG's business is vast and complex, the ramifications of an insurance underwriting crisis would see business grind to a halt around the world.
As one commentator remarked this week; "planes wouldn't fly, ships wouldn't sail, trains wouldn't run" without the confidence of insurance.
The fate of the US auto industry is also being closely watched, with at least one of the Big Three likely to fail or merge in the coming months.
Today, General Motors shares dived 17 per cent after the company's auditors warned the automotive icon might have to file for bankruptcy.
It's a far cry from one of America's best known advertising slogans " what's good for General Motors is good for the country".
Australian rates still relatively high
With Britain's official rate getting closer to zero after today's reduction, Australian rates remain relatively high.
The US rate is set between 0 and 0.25 per cent, Japan is close to zero and like Britain, the Bank of Canada has rates at 0.5 per cent.
The European Central Bank has also slashed rates today to 1.5 per cent although it is taking a more cautious approach to the zero option.
This week Australia's official rate was kept on hold at 3.25 per cent after falling four percentage points since September.
But Wednesday's worse than expected GDP result for the December quarter of last year now has some economists taking about a 75 basis point cut in April.
Even then, Australian rates would still be high in comparison.
So with worsening times ahead, Australia's Reserve Bank has the capacity to cut deeper as developments unfold or as the Prime Minister Kevin Rudd flagged this week, more shocks from the "global economic cyclone".
That's why the RBA kept it's interest rates powder dry by staying on the sidelines earlier this week.
But as the global shockwaves keep coming, expect Australian rates to plunge to as low as 2 per cent by the middle of the year.
The bank has dropped interest rates to 0.5 per cent and announced that it will create another 75 billion pounds ($166 billion) to tackle the UK's deep recession.
Put simply, the global banking system remains broken and little has changed since September last year when the Lehman Brothers collapse set the dominoes falling on Wall Street
That's when the credit crunch exploded into the global financial crisis.
Even though key measure of interbank lending risk (the three month US dollar LIBOR rate) has fallen dramatically from September's high of 4.8 per cent to 1.28 per cent, fear and suspicion is paramount.
This week's reality check is the teetering state of the world's biggest insurer American International Group which posted the biggest quarterly loss in American corporate history.
AIG is regarded as "too big to fail" and this week the chairman of the US Federal Reserve Ben Bernanke acknowledged the collapse of the insurer would effectively crack the bedrock of the financial system.
While AIG's business is vast and complex, the ramifications of an insurance underwriting crisis would see business grind to a halt around the world.
As one commentator remarked this week; "planes wouldn't fly, ships wouldn't sail, trains wouldn't run" without the confidence of insurance.
The fate of the US auto industry is also being closely watched, with at least one of the Big Three likely to fail or merge in the coming months.
Today, General Motors shares dived 17 per cent after the company's auditors warned the automotive icon might have to file for bankruptcy.
It's a far cry from one of America's best known advertising slogans " what's good for General Motors is good for the country".
Australian rates still relatively high
With Britain's official rate getting closer to zero after today's reduction, Australian rates remain relatively high.
The US rate is set between 0 and 0.25 per cent, Japan is close to zero and like Britain, the Bank of Canada has rates at 0.5 per cent.
The European Central Bank has also slashed rates today to 1.5 per cent although it is taking a more cautious approach to the zero option.
This week Australia's official rate was kept on hold at 3.25 per cent after falling four percentage points since September.
But Wednesday's worse than expected GDP result for the December quarter of last year now has some economists taking about a 75 basis point cut in April.
Even then, Australian rates would still be high in comparison.
So with worsening times ahead, Australia's Reserve Bank has the capacity to cut deeper as developments unfold or as the Prime Minister Kevin Rudd flagged this week, more shocks from the "global economic cyclone".
That's why the RBA kept it's interest rates powder dry by staying on the sidelines earlier this week.
But as the global shockwaves keep coming, expect Australian rates to plunge to as low as 2 per cent by the middle of the year.