· Joint move by UK, US, Swiss, Europeans and Canadians
· Unprecedented action to ease global credit crisis
· £50bn injection includes £10bn by Bank of England
* Larry Elliott, Ashley Seager and Jill Treanor
* The Guardian,
* Thursday December 13 2007
The Bank of England joined four other big central banks around the world yesterday in emergency action that will see £50bn injected in to the world money markets in a move designed to prevent the worsening credit crunch derailing the world economy.
In an unprecedented move, which the City said revealed how serious the problems in financial markets had become, central banks offered huge sums of money to commercial banks in an attempt to get them to start lending to each other again.
Speaking to the Guardian, the chancellor, Alistair Darling, welcomed the move: "This was both necessary and very welcome. It sends a very clear signal across the world that central banks stand ready to do whatever is necessary."
Darling has been in constant touch with the Bank's governor, Mervyn King, in recent weeks as it became apparent that the freezing up of credit markets responsible for bringing down Northern Rock seemed to be getting worse, not better.
The government is already braced for the UK economy to slow to around 2% next year, but has become increasingly concerned in recent weeks that Britain's 15-year period of uninterrupted economic growth would be threatened by a prolonged crisis in financial markets.
Although yesterday's initiative was agreed internationally, it comes at a crucial time for Gordon Brown, who is relying on a strong economy to regain the political initiative after a troubled autumn for the government that has seen a series of problems pile up since plans for a snap November poll were aborted.
Ministers are hopeful that more benign financial markets will enable them to end the damaging saga of Northern Rock and restore faith in Labour's reputation for economic competence - seen as vital if the government is to win a fourth election.
Preparations for the intervention began three weeks ago in Cape Town when central bankers and finance ministers from the world's top 20 economies gathered for a routine meeting. But evidence that an improvement in market conditions in October was proving short-lived prompted them to discuss concerted action.
With a daily worsening of conditions in the credit markets over the past week prompting increasingly loud demands by commercial banks for action, central bankers have been in constant touch to discuss the timing and details of a rescue plan.
At 2pm London time yesterday, the five central banks, including the US Federal Reserve, the European Central Bank, the Swiss National Bank and the Bank of Canada, simultaneously announced measures, tailored to the needs of their own markets, to flood money markets with funds in various ways.
The Bank of England said it would offer £10bn of three-month funds on December 18 and again on January 15 and stood ready to do so again if its actions did not free up money markets. Threadneedle Street said it would accept a wide range of high-quality collateral if commercial banks wanted to take advantage of yesterday's offer.
Britain's biggest banks have been pressing for this sort of action from the Bank ever since the crisis blew up in August, but Threadneedle Street was adamant last night that it had not made a U-turn.
"This coordinated set of actions is in response to pressures in inter-bank markets which have increased in recent weeks, reflecting sentiment about the global financial sector," said a Bank spokesman. "These actions demonstrate that central banks are working together to try to forestall any prospective sharp tightening in credit conditions."
Banks have been reluctant to carry out their normal lending to each other as they sought to cover losses they may have suffered from the US sub-prime mortgage crisis. Over the past few weeks, credit has become even scarcer as banks have hoarded cash in order to balance their books for the end of the year.
The seizing up of credit markets has made borrowing more expensive for individuals and banks, and forced the Bank of England last week to cut interest rates for the first time in two years. Despite inflation concerns, the Bank was worried that the credit crunch was starting to affect the whole economy, particularly the housing markets. Analysts expect it may cut rates several more times next year.
Darling said central banks stood ready to act again. "Most people believe this will take some time to work through," he said. But he warned the public not to become too worried as the economy remained strong and employment high.
"We have been growing faster than any other major economy and we are much better placed than many other countries, but there is no doubt that we are going through difficult times," he said.
In the City, analysts said the move was bigger and more coordinated than anything they could remember, including the aftermath of 9/11. "We warmly welcome today's move," said Philip Shaw, chief economist at Investec bank. "While there is no 'silver bullet' fix to credit markets' woes, this should provide much-needed liquidity and restore confidence."
Initially, stock markets reacted positively to the news, with the Dow Jones industrial average surging 200 points in early trading, but dealers later had second thoughts and markets finished only slightly up on the day.
"The [central banks] have gone out and constructed a great big turbo-charged plunger to flush out the clogged credit markets," said Stephen Stanley, analyst at Royal Bank of Scotland Greenwich Capital. "Will it work? I hope so. No one knows, but the simple fact of seeing that the world's central banks are serious about this will go a long way to bolstering psychology, and the extra cash won't hurt either."
In an unprecedented move, which the City said revealed how serious the problems in financial markets had become, central banks offered huge sums of money to commercial banks in an attempt to get them to start lending to each other again.
Speaking to the Guardian, the chancellor, Alistair Darling, welcomed the move: "This was both necessary and very welcome. It sends a very clear signal across the world that central banks stand ready to do whatever is necessary."
Darling has been in constant touch with the Bank's governor, Mervyn King, in recent weeks as it became apparent that the freezing up of credit markets responsible for bringing down Northern Rock seemed to be getting worse, not better.
The government is already braced for the UK economy to slow to around 2% next year, but has become increasingly concerned in recent weeks that Britain's 15-year period of uninterrupted economic growth would be threatened by a prolonged crisis in financial markets.
Although yesterday's initiative was agreed internationally, it comes at a crucial time for Gordon Brown, who is relying on a strong economy to regain the political initiative after a troubled autumn for the government that has seen a series of problems pile up since plans for a snap November poll were aborted.
Ministers are hopeful that more benign financial markets will enable them to end the damaging saga of Northern Rock and restore faith in Labour's reputation for economic competence - seen as vital if the government is to win a fourth election.
Preparations for the intervention began three weeks ago in Cape Town when central bankers and finance ministers from the world's top 20 economies gathered for a routine meeting. But evidence that an improvement in market conditions in October was proving short-lived prompted them to discuss concerted action.
With a daily worsening of conditions in the credit markets over the past week prompting increasingly loud demands by commercial banks for action, central bankers have been in constant touch to discuss the timing and details of a rescue plan.
At 2pm London time yesterday, the five central banks, including the US Federal Reserve, the European Central Bank, the Swiss National Bank and the Bank of Canada, simultaneously announced measures, tailored to the needs of their own markets, to flood money markets with funds in various ways.
The Bank of England said it would offer £10bn of three-month funds on December 18 and again on January 15 and stood ready to do so again if its actions did not free up money markets. Threadneedle Street said it would accept a wide range of high-quality collateral if commercial banks wanted to take advantage of yesterday's offer.
Britain's biggest banks have been pressing for this sort of action from the Bank ever since the crisis blew up in August, but Threadneedle Street was adamant last night that it had not made a U-turn.
"This coordinated set of actions is in response to pressures in inter-bank markets which have increased in recent weeks, reflecting sentiment about the global financial sector," said a Bank spokesman. "These actions demonstrate that central banks are working together to try to forestall any prospective sharp tightening in credit conditions."
Banks have been reluctant to carry out their normal lending to each other as they sought to cover losses they may have suffered from the US sub-prime mortgage crisis. Over the past few weeks, credit has become even scarcer as banks have hoarded cash in order to balance their books for the end of the year.
The seizing up of credit markets has made borrowing more expensive for individuals and banks, and forced the Bank of England last week to cut interest rates for the first time in two years. Despite inflation concerns, the Bank was worried that the credit crunch was starting to affect the whole economy, particularly the housing markets. Analysts expect it may cut rates several more times next year.
Darling said central banks stood ready to act again. "Most people believe this will take some time to work through," he said. But he warned the public not to become too worried as the economy remained strong and employment high.
"We have been growing faster than any other major economy and we are much better placed than many other countries, but there is no doubt that we are going through difficult times," he said.
In the City, analysts said the move was bigger and more coordinated than anything they could remember, including the aftermath of 9/11. "We warmly welcome today's move," said Philip Shaw, chief economist at Investec bank. "While there is no 'silver bullet' fix to credit markets' woes, this should provide much-needed liquidity and restore confidence."
Initially, stock markets reacted positively to the news, with the Dow Jones industrial average surging 200 points in early trading, but dealers later had second thoughts and markets finished only slightly up on the day.
"The [central banks] have gone out and constructed a great big turbo-charged plunger to flush out the clogged credit markets," said Stephen Stanley, analyst at Royal Bank of Scotland Greenwich Capital. "Will it work? I hope so. No one knows, but the simple fact of seeing that the world's central banks are serious about this will go a long way to bolstering psychology, and the extra cash won't hurt either."
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