Central Bank Cash Injections Just Buying Time: Analysts
Wednesday, 08 October, 2008
Huge and continuous infusions of cash by central banks around the world to keep the international banking system afloat are a vital lifeline but cannot resolve the financial crisis, analysts warned on Tuesday.
The European Central Bank made yet more funds available on Tuesday. In the United States, the Federal Reserve and the US Treasury have unveiled additional measures to heal the country’s dysfunctional financial system, with Treasury officials seeking bids by Wednesday to manage a massive bailout plan for the sector.
Central banks in Britain, Japan, and many other countries are also making regular cash injections to keep credit flowing to their economies, as stock markets plunged on fears linked to the worst banking crisis since the 1930s Great Depression. At this point, the “only source of liquidity are central banks,” said the RGE Monitor published on Tuesday by New York University economics professor Nouriel Roubini.
“Despite record liquidity injections into the banking system, banks hoard the cash instead of making new loans for fear they won’t be paid back.”
On Tuesday, the ECB pumped $50 billion (37 billion euros) back into the markets, repeating a one-day transaction that has become a lifeline for eurozone banks that must refinance operations in the US currency. Commercial banks wanted more than double that amount, and were willing to pay a stiff 6.75 percent for the funds that were available. The Bank of Japan loaned 1.0 trillion yen ($9.8 billion) to banks in that country, while the Bank of England offered $40 billion in two operations that drew much less interest than on the continent.
Much of the extra money is reportedly going right back into government treasuries, which are considered the safest investments at present but which create what economists call a ‘liquidity trap.’
The massive injections are therefore keeping a critical network alive, but cannot resolve the financial crisis, which is in large part the result of a breakdown in trust between commercial banks. “Markets are unimpressed and unconvinced,” UBS economist Stephane Deo said. “The action has done little to ease pressures on the interbank market. The interbank market for maturity over a week is still virtually closed.” Money markets determine the availability of credit for vast numbers of people around the globe, from managers trying to fund business operations to families and students seeking personal loans.
The central bank moves “are both essential for the short term survival of several banks, and insufficient to resolve the problems,” Natixis economist Sylvain Broyer told AFP. Even a coordinated central bank interest rate cut that some analysts say is in the offing would not restore the confidence needed to get banks lending to one another again. “No such single solution exists,” acknowledged Citibank analysts, who are among those forecasting possibly imminent central bank action.
Bank of America senior economist Holger Schmieding added: “Amid severe financial tensions, all options are probably now on the table at the ECB, in our view.” In Tokyo, however, Bank of Japan governor Masaaki Shirakawa said Tuesday that coordinated global interest rate cuts were not the answer. “Each country will make its own decision considering its own conditions,” he told a news conference.
Commerzbank economist Michael Schubert warned that an emergency cut might fuel suspicion “that the ECB knows something that we don’t know,” and thus make a bad situation even worse.
Many observers feel the $700 billion plan for the Federal Reserve to buy risky assets from commercial banks will help clear their books of bad loans that have generated the mistrust plaguing interbank markets. In Washington, the Fed said Monday it would expand bank loans up to $900 billion to encourage lending “across a range of financial markets.” The Treasury, meanwhile, said it was looking for specialists familiar with mortgages and mortgage-related securities to buy risky assets from the banks.
Some analysts said governments should inject capital directly into banks in exchange for equity stakes to beef up their level of cash reserves and ease the need to borrow money on the markets. Deo at UBS noted that such a capital boost “would have only a manageable impact on the debt” owed by governments and thus be much cheaper than issuing blanket guarantees for private accounts, as Germany, Greece and Ireland have done. “Direct capital injections (i.e. nationalization) will be required in a number of countries to restore the underlying workings of the financial system,” Deo quoted UBS colleagues Larry Hatheway and George Magnus as saying.
Source: http://www.dailytimes.com.pk/
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