Central Bank Money May Not Be Enough
The three most powerful central banks in the world have joined forces in an attempt to head off a global recession, by injecting £55bn into the monetary system. The Bank of England, the US Federal Reserve and the European Central Bank have combined to try and stave off the problems being caused by the world-wide credit crunch. In an unprecedented move the three central banks hope to relieve some of the fears that have seized high street banks and give them some confidence back in lending to each other.
The US Federal Reserve, the Bank of England, the European Central Bank and institutions from Canada and Switzerland joined forces to offer the emergency loans to the world's beleaguered banking system. There was also action to swap currency into US dollars to address shortages in the European markets. The move was said by bankers to have exceeded the response to the 2001 terror attacks, when banks acted to prevent the financial markets from grinding to a halt.
However, in the cold light of the following day, response has been muted and lenders have called for an even greater intervention. Last week, when the announcement was made, the FTSE 100 drifted up only 22.9 points to 6559.8, and in New York the Dow Jones Industrial Average only went up minimally compared with the nigh-on 300 point loss it suffered on Tuesday, in reaction to the Federal Reserve's interest rate cut of only a quarter point - the financial world wanted more.
George Magnus of UBS said: "It's a confidence-boosting move, saying we will all stand together. And that's fine. But we have to be realistic. Of itself it is not going to solve the problem. It has to be part of a broader package of monetary policy and confidence-building measures. It is very important that the central banks get on top of this pretty quickly."
Co-ordinated action by central banks is very rare, and is only at extreme times. This is such a time. There are £200 billion of sub-prime related losses bubbling around in the world financial system, and bankers are calling for more aggressive rate cuts and more regular injections of cheaper liquidity.
Bank of England Governor Mervyn King has so far resisted such calls, arguing that hauling imprudent financial institutions out of trouble will only encourage them to take bigger bets next time.
However, since August the Bank has been forced into a series of measures of assistance as major commercial banks refuse to lend to each other. The chances that an evaporation of credit could provoke a sharp slowdown in the economy have begun to weigh heavily on central bankers, with experts warning that a recession in the US is getting closer.
Yesterday the Bank of England pledged to offer £22.7bn in two money auctions, one next week and one in January. Mr King discussed the plan in emergency conference calls with banking counterparts from around the world including Fed chairman Ben Bernanke last week. The move, said the Bank, was designed to 'alleviate elevated pressures' in money markets.
"The significant aspect is that this is a co-ordinated response by central banks," said a source at the BoE, adding that the move is not meant to address problems at any 'individual financial institutions'.
Paul Mortimer-Lee, of BNP Paribas, considered the action a 'very helpful step', but also said: "The major central banks cannot afford to fail and they are almost locked into stepping up the scale of any action if things deteriorate."
Published on December 17, 2007
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