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Central banks boost liquidity, markets rally

Latest update : 2008-09-19

As President George Bush vowed that the US would overcome the global financial crisis, the US Federal Reserve announced a joint move, with five of the world's major central banks, to add up to $180 billion in liquidity to world markets.

The world's top central banks announced a huge operation Thursday to boost the volume of dollars available to strangled money markets as global financial turmoil ripped deeper into confidence.

 

"Today, the Bank of Canada, the Bank of England, the European Central Bank (ECB), the (US) Federal Reserve, the Bank of Japan and the Swiss National Bank (SNB) are announcing coordinated measures," they said.

 

After already providing half a trillion dollars this week following the collapse of Lehman Brothers, the US Federal Reserve increased its so-called dollar swap lines with other central banks to a massive 180 billion dollars.

 

This, it is hoped, will "address the continued elevated pressures in US dollar short-term funding markets," according to a statement.

 

The measures, "together with other actions taken in the last few days by individual central banks, are designed to improve the liquidity conditions in global financial markets."

 

The ECB meanwhile announced another quick one-day tender of 25 billion euros (36 billion dollars) after having this week already dished out 100 billion euros in short-term loans in two similar emergency actions.

 

Japan's central bank chief Masaaki Shirakawa said after an emergency board meeting -- the ECB's governing council was also meeting Thursday -- that "taking swift measures was necessary."

 

"The tension in international financial markets has been rapidly increasing and spreading to unexpected areas," Shirakawa said.

 

The concerted central bank action appeared to be having some effect, with both European stock markets and yields on short-term government bonds on the rise ahead of the Wall Street opening bell.

 

Commerzbank analyst Michael Schubert said he believed the central banks may now have a handle on the crisis -- provided there are no more of what he called "upsets."

 

"What central banks have tried to do is to smoothe the very short term money markets and if there is no additional negative information I think they will be able to do this," Schubert told AFP.

 

There may well be other upsets, however, with Morgan Stanley reportedly in talks to merge with US regional lender Wachovia or be bought by HSBC or China's CITIC. US thrift Washington Mutual was also at the centre of market worries.

 

Since the credit crunch began 14 months ago, distrust about the quality of assets being offered as collateral has spread through the money markets where banks usually make very short term loans to each other.

 

The resulting drying up of liquidity became a drought this week with the demise of Lehman Brothers and the last-minute rescues of fellow Wall Street titan Merrill Lynch and of insurance giant AIG.

 

As a result, central banks have had to step up to the plate and fulfill their traditional role as the lender of last resort, making hundreds of billions of dollars worth of short term loans available to stop these markets suffocating.

 

The turmoil on Wall Street has seen investors desperately seeking higher ground, in the form of short-term government bonds and gold -- the classic safe haven in troubled times -- and has also claimed victims outside the United States.

 

Britain's Lloyds TSB agreed Thursday to buy rival HBOS for 12.2 billion pounds (15.4 billion euros, 21.8 billion dollars) in what is effectively a rescue for Britain's biggest mortgage lender.

 

In Russia, where a massive sell-off forced stock markets to shut down for an hour on Tuesday and for most of Wednesday to prevent a meltdown, President Dmitry Medvedev on Thursday ordered government support.

 

Date created : 2008-09-18

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