Defense Is Mounted For Shaken Markets
The world's major central banks banded together Thursday to flood global money markets with massive amounts of U.S. dollars, in hopes of taming a major source of the tensions rocking the financial system.
In a concerted move, the U.S. Federal Reserve said it will expand or introduce measures to shuttle dollars to major European central banks, the Bank of Canada and the Bank of Japan, so that those banks can provide short-term dollar funding to commercial banks. Officials in South Korea, Hong Kong, Taiwan and other markets also pledged to inject more money into their financial systems.
The central banks' moves came in the wake of a meltdown in global financial markets as short-term funding markets seized up and investors piled into U.S. Treasury bills in an unprecedented rush to safety. Concerns about redemptions in the $3.6 trillion money-market industry -- a key provider of liquidity to short-term funding markets -- and rising strains in the banking system had sent short-term funding rates sharply higher Wednesday.
'Today's coordinated intervention shows that the [central banks] are acting to address market-liquidity failure -- this is itself reassuring,' Laurence Mutkin, head of European interest-rate strategy at Morgan Stanley in London, wrote in a research note. But he added that 'the intervention does not directly address the key problem . . . banks' desire to hoard cash and their reluctance to lend to each other.'
China announced steps Thursday to directly prop up its sagging stock market. Its official state news agency said after the close of trading that an arm of its sovereign-wealth fund will buy shares of the country's three largest listed banks and take other steps to bolster its stock market.
The moves by the central banks in the West and Japan helped turn around sharp stock drops in Asia, where investors were responding to Wednesday's 4.1% slide in the U.S.'s Dow Jones Industrial Average. Hong Kong's Hang Seng Index ended down only slightly after dropping as much as 7.4% intraday on worries over bank stocks. The Shanghai Composite Index, which tracks both Class A and Class B shares in China, ended down 1.7% after being down as much as 6%.
Europe also was cheered initially, but markets retreated and most finished lower. London's FTSE 100 ended down 0.7%, while France's benchmark fell 1.1%. The dollar-denominated overnight London interbank offered rate, or Libor, a benchmark reflecting the rates at which banks lend to one another, fell to 3.843% from 5.031% Wednesday. But the three-month dollar-lending rate rose, as did the gap between longer-term rates and market expectations for central-bank policy rates, suggesting that fears remain about banks' longer-term soundness.
The market turmoil is pushing up borrowing costs for U.S. companies, and the debt markets have become nearly inaccessible to all but the most creditworthy borrowers. Investors are worried about the fate of financial institutions in particular, following the U.S. government bailout of American International Group Inc., the bankruptcy filing of Lehman Brothers Holdings Inc., the sale of Merrill Lynch & Co. to Bank of America Corp. and news that Morgan Stanley may also strike a deal.
'We've seen crisis. We've seen recession. But we've not seen the core of the financial system shaken like this,' says Joseph Balestrino, a portfolio manager at Federated Investors. 'It's just crazy.'
The financial uncertainty is prompting lenders to shut their spigots and has rocked bond, currency and commodity markets as investors seek safe places for their money. At one point Wednesday in the U.S., investors were paying more for one-month Treasurys than they could expect to get back when the bonds matured. On Thursday, the yen fell back from Asian highs, reflecting some improvement in sentiment, while the euro strengthened against the dollar.
The U.S. Fed boosted its U.S. dollar swap line with foreign central banks by $180 billion. (The swap line is an arrangement through which foreign central banks can get U.S. dollars from the Fed.) The European Central Bank, which has had a swap line with the Fed in place since December, increased its line to as much as $110 billion from $55 billion. The Swiss central bank swap line also got a boost, to $27 billion from $12 billion. With the expanded swap lines, the ECB and Swiss National Bank will raise the amount of dollars they offer for 28 and 84 days in auctions they hold every other week.
The Fed also debuted new swap lines with the Bank of Japan for $60 billion, the Bank of England for $40 billion and the Bank of Canada for $10 billion. All the swap lines expire Jan. 30.
In a joint statement, the group of central banks said, 'These measures, together with other actions taken in the last few days by individual central banks, are designed to improve the liquidity conditions in global financial markets. The central banks continue to work together closely and will take appropriate steps to address the ongoing pressures.'
Under the new agreement, the European central banks will offer overnight U.S. dollar funding to their respective markets daily. The ECB and Bank of England will offer as much as $40 billion in overnight funds, while the Swiss central bank will offer as much as $10 billion. The ECB's first auction Thursday morning saw intense demand, with 61 financial institutions bidding more than $101 billion for the $40 billion being offered. In the U.K., banks took about $14 billion of the $40 billion offered. Many British banks have access to U.S. dollar funding through their subsidiaries stateside.
On Thursday, Taiwan's stock market fell 2.7%, Japan's 2.2% and Australia's 2.4%, with financial stocks under pressure again as markets speculated on the next big bank to be sold.
Asian central banks pumped tens of billions of dollars into jittery credit markets Thursday. Taiwan shares were helped off their early lows as the Taiwan Stabilization Fund said recent falls had met the criteria for the fund to intervene in the market, which it would do as needed. The Reserve Bank of India injected 489.5 billion rupees ($10.6 billion) through a mechanism it calls the liquidity-adjustment facility. The RBI injected another 263.65 billion rupees through a second auction.
The Reserve Bank of Australia released a net total of 803 million Australian dollars (US$637.6 million) in its daily market operations Thursday, and the Hong Kong Monetary Authority said it bought 1.556 billion Hong Kong dollars (US$200 million) worth of U.S. dollars to inject liquidity into the local banking system.
The Bank of Korea left unsold 3.5 trillion won ($3.1 billion) worth of repurchase agreements in the short-term money market to help relieve a liquidity squeeze in the market.
Joellen Perry / Rosalind Mathieson / Neelabh Chaturvedi |
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