Governments Worldwide Move to Stanch Panic
Friday, September 19, 2008
Governments around the world moved in extraordinary unison yesterday to contain the spreading panic over the crisis in the United States, injecting up to $180 billion into the global financial system and moving quickly to shore up their own damaged lenders and markets.
The Federal Reserve and central banks in Europe, Japan and Canada teamed up to extend the funds to domestic lenders that are unable to access cash in dried-up global money markets. Central banks in Nigeria and Australia joined in the effort as well on their own, while the Russian government closed its main stock exchange for the day pending provision of new government money.
The actions appeared to help calm investors in some countries, slowing the decline in key European markets. But in other countries, fresh concerns emerged about the scope of the global impact in a world where financial institutions are more interconnected than ever.
In televised statements, political leaders and central bankers echoed President Bush in offering assurances to anxious citizens. British Prime Minister Gordon Brown promised action against "irresponsible behavior" in financial markets, while Japanese central bank Governor Masaaki Shirakawa called himself "not concerned" that the stability of Japanese financial markets was at risk. This morning, the Bank of Japan pumped more cash into money markets; in the past four days it has injected $96 billion.
Signs of contagion included a crisis of confidence in Australia, which hit that country's two largest investment banks, Macquarie Group and Babcock & Brown. They endured massive sell-offs amid concerns that their investment models were too similar to those used by fallen Wall Street institutions.
In Britain, regulators helped bring about the takeover of HBOS, the country's biggest mortgage lender, by Lloyds TSB for $22.2 billion. They slapped a temporary ban on the short-selling of shares in financial companies that are listed on the London Stock Exchange, joining U.S. regulators in cracking down on a practice that has been faulted for heightening market turmoil in recent days. In short-selling, investors borrow shares, sell them and hope to replace them with shares purchased at a lower price.
In China, the government said it would eliminate a tax on stock purchases and buy shares in three of the largest state-owned banks to stem investor fears. At the same time, "the sudden downfall of several prominent global institutions has authorities concerned about ripple effects and is prompting a reassessment of the pace of China's financial sector reforms," Jing Ulrich, chairman of China equities at J.P. Morgan, wrote in a report yesterday. The reforms are meant to give market forces more sway.
The joint action by central bankers roughly doubled the amount of dollars available to foreign central banks to more than $250 billion. The action, known as a "swap line," is designed to address one of the biggest problems facing the world's financial system -- a massive shortage of dollars that has made it nearly impossible for banks around the world to access the short-term loans they need for daily operations and international transactions, which are still largely conducted in U.S. dollars.
The central banks in Britain, Canada, Japan and Switzerland, as well as the European Central Bank, agreed to set aside billions worth of their own currencies as collateral in exchange for massive new lines of credit in dollars from the Federal Reserve.
By lending the money, the Fed dampens the need for the central banks to buy massive amounts of dollars, something that could potentially spread the crisis to international currency markets. In addition, the swap line allows the risk of lending to foreign banks and institutions to be borne directly by the central banks in those nations.
But foreign central banks and multilateral lenders still expected the United States to do far more to right its own financial system.
"Monetary and budget policies are critical, but these provide only a first and second line of defense against the deleterious impact of a financial crisis," John Lipsky, deputy managing director of the International Monetary Fund, said yesterday in a speech in Washington. "The use of public funds to safeguard the financial system that we have labeled the third line of defense may become imperative."