Central banks around the world banded together to stem a mounting credit crisis on Wednesday in their first co-ordinated action since terror attacks shut down US financial markets on September 11, 2001.
The US Federal Reserve, the European Central Bank and the central banks of Canada, England and Switzerland announced steps to make it easier for stressed banks to access cash in the hopes of quelling a credit crunch that threatens to knock the US economy into recession and slow growth worldwide.
The Bank of Japan and Sweden's Riksbank also issued statements that they were lending support to the plan. "There was a desperate need for new weapons to be deployed," said Marco Annunziata, chief economist at Unicredit in London. "The strength of the new central banks' offensive comes from its novelty, its targeted nature, and its co-ordinated deployment."
The news initially brought a wave of relief to stock markets after sharp declines the previous day when the Fed cut interest rates by a modest quarter-percentage point, dashing hopes of a more aggressive move. But by early Wednesday afternoon, stocks cut their gains as investors weighed the implications of the proposed plan. The Dow industrials ended the day up 41.13 points at 13,473.90 after jumping 250 points early in the day, while US Treasury bond prices slid.
The Fed said it would launch a "temporary term auction facility." The move expands the number and the reach of banks allowed to borrow money to meet temporary shortages of funds. The US central bank announced two auctions of up to $20 billion each in short-term funding next week, with two others raising unspecified amounts to follow in January.
While the dollar volume of the measures was smaller than some past emergency efforts, analysts said the united front that central banks were presenting underscored the seriousness with which they viewed current stresses in financial markets.
"The size here is not the point ... it's the signal here that matters," said Bruce Kasman, chief economist for J.P. Morgan Chase. "These guys are coming and telling you they're going to be there. They're going to come in and make sure the liquidity issues in the marketplace don't get to be too severe."
'ELEVATED PRESSURES' In addition to the Fed's new auction plan, the US central bank said it would provide dollars to the ECB and the Swiss National Bank through so-called currency swap lines to help ease funding pressures in Europe.
The swap line with the ECB would be for up to $20 billion, while the line with the Swiss National Bank would be for up to $4 The ECB said it would use the swap facility to offer European institutions dollar funding in any cases where European financial firms encountered "elevated pressures" in short-term credit markets.
ECB Vice President Lucas Papademos said the ECB's decision to lend US dollars to euro-zone banks would help them fund dollar liabilities such as off-balance-sheet investment vehicles, especially if the banks' size made it harder for them to buy dollars in the currency market. "There is nothing that has worsened today in particular. Pressures have remained at a heightened level in recent weeks," he said at a news conference.
LUBRICATING THE MARKETS' WHEELS The Bank of Canada also said it would launch a temporary auction facility, adding that it would expand the list of securities eligible as collateral for central bank loans. The Bank of England said it would offer three-month loans against a wider range of collateral.
The moves come after interest-rate cuts by the Fed, the Bank of Canada and the Bank of England failed to soothe worries that banks would continue to pull back from lending. Fed and ECB officials said the steps had been under consideration for some time and were not aimed at helping any particular institution, but instead were meant to help markets generally function more smoothly.
"This is not about particular financial institutions with particular problems. It is about market functioning," a senior Fed official said, adding that the announcements were not in response to Wall Street's disappointment with the US central bank's decision on Tuesday. The official said the Fed hoped that banks reticent to borrow at the discount window out of concern they could be seen as being in financial distress might be more willing to use the auction facility, which would provide the cloak of anonymity.
Investors and policy-makers have been caught off guard by how hard the broadly rising defaults on US subprime mortgages have hit the markets and the nation's economy. As roughly 1.8 million adjustable rate mortgages line up for reset at sharply higher interest rates in 2008, homeowners and banks may face more pain ahead.
Comments
Comments are closed.