Crisis action launched for global finance system
The world's biggest central banks moved without warning to cut a key interest rate in a bid to halt the euro zone's crisis, unleashing a flood of money into financial markets.
The dramatic surge of funds sent financial markets soaring, with the Australian dollar erasing a month's losses in a matter of seconds to soar as high as $US1.033 US cents - for a gain of almost 3 US cents. Australian shares joined the powerful rally added as much as $33 billion in early trading today.
The central banks of the euro zone, Canada, Britain, Japan, United States and Switzerland acted in unison to make it cheaper for banks to borrow in emergencies.
The move is aimed to preventing a credit freeze taking hold that would see banks reluctant to lend to each other - and then to customers -as happened during the depths of the 2008-09 global financial crisis.
The central banks said they were engaging in "coordinated actions to enhance their capacity to provide liquidity support to the global financial system," according to the statement.
"The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity," they added.
China, the nation which contributes most to global growth and is Australia's biggest export market, chimed in by cutting the amount of cash that its banks must set aside as reserves for the first time since 2008. That move alone may add about $53 billion to its financial system, according to investment bank UBS.
Markets surge
Global stock markets have rocketed on the central banks' actions. Shares in Europe added more than 4 per cent while Wall Street is trading on gains of more than 3 per cent.
Australian shares are having their best day in weeks, adding about 3 per cent in early trading, and paring this year's loss to about 11 per cent.
The Australian dollar, which snuck above parity with the greenback late on Tuesday but closed yesterday at 99.91 US cents, has jumped to as high as $US1.0334 in overnight trade, and recently traded at $US1.027.
Wall Street ended more than 4 per cent higher, with the Dow Jones Industrial Average posting its best day since March 2009. German stocks were up 5 percent with other European bourses higher by slightly less.
The euro also spiked on the foreign exchange markets, as traders sensed it could ease European banks' credit worries.
The gains, though, may be temporary unless further steps are taken to resolve Europe's sovereign debt load, analysts said.
“
It’s supportive but not necessarily a game changer,” said Michelle Girard, senior US economist at RBS Securities Inc. in Stamford, Connecticut. “
The impact is more psychological than anything else” as investors take heart from policy makers’ coordination, she said.
Commercial bank relief
The arrangement allows the central banks to lend dollars to commercial banks that might be finding it hard to borrow them directly from other banks and is aimed at easing tensions in the crucial interbank lending market.
The banks said they were not only reducing the interest rate on this operation by half a percentage point from December 5, but also extending it until February 1, 2013.
Bank of Japan Governor Masaaki Shirakawa said the move was aimed at giving markets "a sense of relief," but warned it was not enough on its own to solve Europe's fiscal woes.
"The European debt problem can't be solved by liquidity provisions alone," he told a press conference, according to Dow Jones Newswires.
"The step is meant to buy time for European countries to proceed with their fiscal and economic reform," he added.
French Finance Minister Francois Baroin hailed the move as "very positive", on the sidelines of a European Union meeting in Brussels.
Christian Schulz, a senior economist with Berenberg Bank, said the action could relieve serious strain on markets.
"As always in market panics with central bank action, the signal is more important than the actual size of the action," he said.
"While today's central bank action does not resolve the European sovereign debt crisis, it should ease the panic around European banks significantly and help preventing a devastating credit crunch."
The central banks also agreed to allow cash swap arrangements in any of the participating countries' currencies if market conditions require them.
"At present, there is no need to offer liquidity in non-domestic currencies other than the US dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise," they said.
This "will probably help banks to get necessary liquidity to run their domestic operations in a smooth way," an Italian trader told Dow Jones Newswires.
Such dollar operations were used to ease a credit crunch during the financial crisis of 2008-2009 and resumed in September in response to a dollar shortage among eurozone banks hit by the debt crisis.
However, Tom Levinson from ING bank said the onus was still on European leaders to come up with a solution to the debt crisis.
Unless the eurozone comes up with a "convincing answer" soon, "we would expect downward pressure on the euro to resume, with central banks forced to get ever more creative as their toolboxes are emptied," said the analyst.
AFP, Bloomberg with BusinessDay
---
Notice two things:
-- Not one mention of incredible superpower India.
-- This is a short term attempt to change market psychology; the European fundamentals remain dire.
