 Central banks bolster efforts to jolt markets
(China Daily)
Updated: 2008-10-17 08:06  Europe's central banks are intensifying efforts to jolt credit markets back to life. The European Central Bank on Wednesday said it will accept lower-rated securities as collateral when lending to banks and offer them as many euros as they want over the next six months. The Swiss central bank said it will conduct currency swaps with the ECB, which today said it will also support the Hungarian central bank's money-market operations. The Bank of England will unveil plans to revamp its market operations at 11 a.m. in London. "Central banks are throwing everything they can at the credit markets to get them working again," said Win Thin, an economist at Brown Brothers Harriman & Co in New York. Policymakers are becoming more creative as they try to end a 14-month credit freeze which has left their economies on the edge of recession. By extending ties with Switzerland and Hungary, the ECB is also increasingly serving as a central banking hub for Europe by seeking to improve the flow of money through its neighboring economies. Throwing open the door to what it will accept when lending, the ECB will now exchange cash for debt securities denominated in dollars, pounds and yen as well as euros as long as they are issued in the 15-nation bloc. The changes take effect imminently and stay in force until the end of next year. Much more substantial "Essentially, they are moving to provide financing in a much more substantial way to the banking system," said Julian Callow, chief European economist at Barclays Capital in London. He calculates the ECB's new willingness to accept certificates of deposit could generate up to 450 billion euros alone. The rating on the bonds accepted in market operations was cut to BBB- from A-, with the exception of asset-backed securities. The ECB also said it's expanding its program of offering banks unlimited cash to all "longer-term" operations. Previously this only applied to its weekly operations. The Bank of England is also stepping up its efforts amid criticism it hasn't done enough to tackle the crisis and plans to introduce a discount-window facility. Kenneth Broux, economist at Lloyds TSB Group Plc, said it may follow the ECB in widening the collateral and credit ratings it will accept for loans. "Central banks are moving in coordinated fashion, which is good news, and there's room for the Bank of England to follow," he said. The shift follows a redoubling of efforts by policy makers to thaw money markets. In the past week, the ECB said it will offer banks as many euros and dollars as they want and joined the Bank of England and other counterparts in a united round of interest-rate cuts. Governments have also established programs to recapitalize banks and guarantee bank lending. The Frankfurt-based ECB on Wednesday lent banks $170.9 billion for seven days at a fixed rate of 2.277 percent and the Bank of England allotted $76.3 billion. The central banks last week cut their main rates by half-points to 3.75 percent and 4.50 percent respectively. "The ECB is trying to ensure that at least a significant share of the 50 basis-point rate cut which it consented on Oct 8 will be effectively passed to the rest of the economy," said Gilles Moec, an economist at Bank of America Corp in London and a former official at the French central bank. Policy makers have so far had some success in reducing money-market rates, with the cost of borrowing euros over three months falling for a fifth day on Wednesday to 5.175 percent. Even so, banks remain skeptical of lending to each other, depositing a record 210.8 billion euros with the ECB on Wednesday rather than storing it elsewhere. "Despite some positive reaction, the interbank market has still not come to life," said Carsten Brzeski, an economist at ING Group in Brussels. "The only question remains whether the ECB has any ammunition left." President Jean-Claude Trichet said Oct 12 that the ECB lacks the legal powers to immediately follow the Federal Reserve in opening a facility to buy commercial paper. The ECB may have acted in part because some banks were running short of acceptable collateral, according to Moec. Dropping the cap on cash over a longer time should also help the economy by reducing 3-month and 6-month lending rates which serve as benchmarks for some loans to companies and consumers, he said. Agencies (China Daily 10/17/2008 page17) |
