Central Banks Pump Cash Into Market

Central Banks Pump Cash Into Market

By MATTHEW SALTMARSH
Published: September 18, 2008
PARIS — The Federal Reserve, the European Central Bank, the Bank of Japan and other central banks significantly escalated the assistance offered to global money markets on Thursday, coordinating efforts to ease monetary constraints stemming from the turmoil emanating from Wall Street.


Richard Drew/Associated Press
Christopher Crotty worked on the floor of the New York Stock Exchange on Wednesday.
The Fed said in a statement that it had authorized a $180 billion expansion of its temporary reciprocal currency arrangements, known as swap lines, to allow banks to borrow more dollars in markets at a lower rates.

“This is clearly a very significant help and central banks are showing decisive leadership here as risk aversion is hitting the private sector,” said Julian Callow, the chief European economist at Barclays Capital in London.

The Fed also authorized increases in the existing swap lines with the European Central Bank, up to $110 billion from $55 billion, and the Swiss National Bank, up to $27 billion from $15 billion.

New swap facilities were established by the Fed with the Bank of Japan, for $60 billion; the Bank of England, for $40 billion; and the Bank of Canada for $10 billion.

“The central banks continue to work together closely and will take appropriate steps to address the ongoing pressures,” the European Central Bank said in a statement.

The concerted action followed sharp drops in financial markets amid fears of more Wall Street failures during a week that saw Lehman Brothers file for bankruptcy protection, Merrill Lynch sell itself to Bank of America and an $85 billion bailout of the insurance giant the American International Group.

At the same time, banks had drastically slowed their lending to each other via the money markets as the short rates at which they borrow surged and they sought to keep cash on their books, fearful that loans might not be repaid.

Benchmark indexes in Europe rose Thursday and short-term dollar funding costs fell after the central bank action. The FTSE-100 added 1.5 percent.

Mr. Callow at Barclays said the move showed how significant smooth operations in money markets are considered by the central banks and just how concerned policy makers are by the health of lenders.

Late Wednesday, news emerged of possible takeovers involving the investment bank Morgan Stanley and the thrift Washington Mutual. The sale of the major British mortgage lender HBOS was confirmed Thursday, reflecting the seismic change in the global financial landscape.

Central banks in Japan, Australia and India pumped a further $28 billion into money markets while China relaxed its monetary policy for the second time this week, Reuters reported.

South Korea sold dollars in the swap market and said it would try to halt the slide in bond prices, the Philippines intervened to support the peso and Taiwan warned it could use a state fund to prop up stocks as markets see-sawed across the region.

Still analysts said that the cash infusions did not necessarily mean that central banks would lower their benchmark short term interest rates.

“If anything,” Mr. Callow said. “this sends the signal that they are trying to achieve stability via money markets rather than by cutting short term rates.”

Michael Schubert, an analyst at Commerzbank, said: “The E.C.B. strictly separates its liquidity provision policy and the stance of monetary policy.”

“This, and possible other measures to address the pressures in money markets, do not indicate a higher probability for an E.C.B. rate cut in the foreseeable future,” Mr. Schubert said.