Central Banks Add Cash to Avert Crisis of Confidence
By Scott Lanman and Christian Vits
Aug. 10 (Bloomberg) -- Central banks in the U.S., Europe, Japan, Australia and Canada added about $136 billion to the banking system in an attempt to avert a crisis of confidence in global credit markets.
The Federal Reserve, in a second day of action in concert with the European Central Bank, provided $38 billion of reserves and pledged more ``as necessary,'' in a statement unprecedented since after the Sept. 11, 2001, attacks.
Money market rates rose worldwide the past two days on evidence the subprime crisis is spreading after global investors piled into U.S. securities backed by mortgages. By the end of the day, the central bank actions helped spark a turnaround in American stocks and drive the U.S. overnight bank lending rate below the Fed's target.
``They accomplished their short-term mission to make sure the market stabilized ahead of the weekend,'' said David Resler, chief economist in New York at Nomura Securities International Inc. ``It remains to be seen how much more they'll have to do.''
The U.S. federal funds rate opened at 6 percent, a six-year high. It sank as low as 1 percent in late trading, according to ICAP Plc, after the New York Fed staged three repurchase operations, buying assets including mortgage-backed securities. The total of $38 billion, following $24 billion yesterday, was the highest amount of temporary funds since Sept. 12, 2001.
`Unlimited' Ability
``The Fed has almost unlimited ability to supply liquidity if they feel that is appropriate,'' said Alice Rivlin, a former Fed vice chairman who's now at the Brookings Institution in Washington.
Fed policy makers just three days ago held their target for the federal funds rate, the overnight lending rate between banks, at 5.25 percent. Fed Chairman Ben S. Bernanke and his colleagues acknowledged in their statement that markets were ``volatile'' and risks to growth had risen. Yet they reiterated, in language used since March, that inflation was the ``predominant'' concern.
Today, the Fed said in an unscheduled statement that it will add money as needed to steer the federal funds rate ``close to'' the 5.25 percent target. Officials also noted that direct loans through the Fed's discount window are available ``as always.''
``They certainly calmed the markets,'' said Chuck Lieberman, a former New York Fed economist who's now chief investment officer of Advisors Capital Management LLC in Paramus, New Jersey. ``There's nothing that has been done yet by the Fed that implies that they will or for that matter will not cut the funds rate.''
Europe's Response
The European Central Bank loaned 61.05 billion euros ($83.6 billion) after injecting a record 94.8 billion euros of funds yesterday that had to be paid back today. Overnight euro rates again rose as high as 4.27 percent today, compared with the ECB's benchmark rate of 4 percent.
The ECB is ``giving the markets the appropriate liquidity,'' ECB President Jean-Claude Trichet told daily newspaper Ouest- France in an interview. The bank is paying ``great attention to the markets,'' he said.
Japan's central bank added 1 trillion yen ($8.5 billion) today and the Reserve Bank of Australia lent $4.2 billion, the most in more than three years. Central banks in Norway and Switzerland also injected money into the financial system and countries including Denmark, Indonesia and South Korea said they're ready to provide cash.
Spreading Crisis
The credit-market turmoil worsened this week after European banks acknowledged their vulnerability to rising delinquencies on American subprime mortgages. In the U.S., American Home Mortgage Investment Corp. this week became the country's second-biggest home lender to file for bankruptcy.
BNP Paribas SA, France's biggest bank, was forced to halt withdrawals from three of its investment funds. Just last week, BNP Chief Executive Officer Baudouin Prot said the bank wasn't at risk. Germany's government had to organize a bailout of IKB Deutsche Industriebank AG as the Dusseldorf-based bank unveiled potential losses of as much as 3.5 billion euros.
Countrywide Financial Corp., the biggest U.S. mortgage lender, today said it faces ``unprecedented disruptions'' that may hurt profit. Countrywide won't be able to sell as many of its loans as expected because investor demand has dried up, the Calabasas, California-based company said. NIBC Bank NV in the Netherlands posted losses from U.S. credit investments.
Japan Monitoring
``The effect of U.S. subprime loans is spreading to financial markets around the world,'' said Hiroko Ota, Japan's minister in charge of economic and fiscal policy. ``We need to carefully monitor how this will affect the economy.''
Stocks declined in Europe and Asia today as concern increased that the widening credit crunch may hurt economic growth and earnings. The Morgan Stanley Capital International World Index lost 1.5 percent to 1531.42.
American stock indexes recovered most of their losses earlier in the day, with the Standard & Poor's 500 Index closing 0.55 point higher at 1,453.64.
President George W. Bush is getting regular updates on the markets at his family's vacation compound in Kennebunkport, Maine, White House spokeswoman Dana Perino said.
Bush's advisers ``are keeping a very close eye on all the market activity and making sure that policies are put in place to keep our economy strong and growing,'' Perino told reporters.
By Scott Lanman and Christian Vits
Aug. 10 (Bloomberg) -- Central banks in the U.S., Europe, Japan, Australia and Canada added about $136 billion to the banking system in an attempt to avert a crisis of confidence in global credit markets.
The Federal Reserve, in a second day of action in concert with the European Central Bank, provided $38 billion of reserves and pledged more ``as necessary,'' in a statement unprecedented since after the Sept. 11, 2001, attacks.
Money market rates rose worldwide the past two days on evidence the subprime crisis is spreading after global investors piled into U.S. securities backed by mortgages. By the end of the day, the central bank actions helped spark a turnaround in American stocks and drive the U.S. overnight bank lending rate below the Fed's target.
``They accomplished their short-term mission to make sure the market stabilized ahead of the weekend,'' said David Resler, chief economist in New York at Nomura Securities International Inc. ``It remains to be seen how much more they'll have to do.''
The U.S. federal funds rate opened at 6 percent, a six-year high. It sank as low as 1 percent in late trading, according to ICAP Plc, after the New York Fed staged three repurchase operations, buying assets including mortgage-backed securities. The total of $38 billion, following $24 billion yesterday, was the highest amount of temporary funds since Sept. 12, 2001.
`Unlimited' Ability
``The Fed has almost unlimited ability to supply liquidity if they feel that is appropriate,'' said Alice Rivlin, a former Fed vice chairman who's now at the Brookings Institution in Washington.
Fed policy makers just three days ago held their target for the federal funds rate, the overnight lending rate between banks, at 5.25 percent. Fed Chairman Ben S. Bernanke and his colleagues acknowledged in their statement that markets were ``volatile'' and risks to growth had risen. Yet they reiterated, in language used since March, that inflation was the ``predominant'' concern.
Today, the Fed said in an unscheduled statement that it will add money as needed to steer the federal funds rate ``close to'' the 5.25 percent target. Officials also noted that direct loans through the Fed's discount window are available ``as always.''
``They certainly calmed the markets,'' said Chuck Lieberman, a former New York Fed economist who's now chief investment officer of Advisors Capital Management LLC in Paramus, New Jersey. ``There's nothing that has been done yet by the Fed that implies that they will or for that matter will not cut the funds rate.''
Europe's Response
The European Central Bank loaned 61.05 billion euros ($83.6 billion) after injecting a record 94.8 billion euros of funds yesterday that had to be paid back today. Overnight euro rates again rose as high as 4.27 percent today, compared with the ECB's benchmark rate of 4 percent.
The ECB is ``giving the markets the appropriate liquidity,'' ECB President Jean-Claude Trichet told daily newspaper Ouest- France in an interview. The bank is paying ``great attention to the markets,'' he said.
Japan's central bank added 1 trillion yen ($8.5 billion) today and the Reserve Bank of Australia lent $4.2 billion, the most in more than three years. Central banks in Norway and Switzerland also injected money into the financial system and countries including Denmark, Indonesia and South Korea said they're ready to provide cash.
Spreading Crisis
The credit-market turmoil worsened this week after European banks acknowledged their vulnerability to rising delinquencies on American subprime mortgages. In the U.S., American Home Mortgage Investment Corp. this week became the country's second-biggest home lender to file for bankruptcy.
BNP Paribas SA, France's biggest bank, was forced to halt withdrawals from three of its investment funds. Just last week, BNP Chief Executive Officer Baudouin Prot said the bank wasn't at risk. Germany's government had to organize a bailout of IKB Deutsche Industriebank AG as the Dusseldorf-based bank unveiled potential losses of as much as 3.5 billion euros.
Countrywide Financial Corp., the biggest U.S. mortgage lender, today said it faces ``unprecedented disruptions'' that may hurt profit. Countrywide won't be able to sell as many of its loans as expected because investor demand has dried up, the Calabasas, California-based company said. NIBC Bank NV in the Netherlands posted losses from U.S. credit investments.
Japan Monitoring
``The effect of U.S. subprime loans is spreading to financial markets around the world,'' said Hiroko Ota, Japan's minister in charge of economic and fiscal policy. ``We need to carefully monitor how this will affect the economy.''
Stocks declined in Europe and Asia today as concern increased that the widening credit crunch may hurt economic growth and earnings. The Morgan Stanley Capital International World Index lost 1.5 percent to 1531.42.
American stock indexes recovered most of their losses earlier in the day, with the Standard & Poor's 500 Index closing 0.55 point higher at 1,453.64.
President George W. Bush is getting regular updates on the markets at his family's vacation compound in Kennebunkport, Maine, White House spokeswoman Dana Perino said.
Bush's advisers ``are keeping a very close eye on all the market activity and making sure that policies are put in place to keep our economy strong and growing,'' Perino told reporters.
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