Governments Worldwide Move to Stanch Panic

By Anthony Faiola and Philip P. Pan
Washington Post Staff Writers
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."

After two days of temporary trading suspensions, Russia took the extraordinary step yesterday of keeping its main stock exchange closed for the day. The government announced a plan to directly invest as much as $20 billion in the markets, and is lending $44 billion to the country's three biggest banks.

President Dmitry Medvedev, his face grim, convened a meeting of the country's top finance officials in an ornate Kremlin hall and sought to reassure investors that the government was acting aggressively. "There is no more important task for Russian authorities than the stability of our financial system under the current circumstances," he said in the first part of the meeting.

Prime Minister Vladimir Putin, the country's paramount leader, also reassured investors. Though capital flight has gripped Russia since its August invasion of Georgia, Putin blamed the economic turmoil in the United States and Europe for his country's financial problems. Putin left open the possibility of diverting oil and gas revenue. "I don't think the time has come to spend the oil and gas revenues, but we have them. Of course, we can use them, if necessary, to support the financial markets," he said.

In Germany, officials stewed over the discovery that a key state bank, KfW, had sent Lehman Brothers $435 million Monday, even though the news was full of reports the day before that Lehman was about to fail.

By day's end, European markets were mostly down, but by much smaller percentages than in previous sessions. The FTSE 100 was down 0.66 percent and the CAC 1.06 percent, while the DAX rose 0.04 percent. Brazil's Bovespa was up 5.48 percent.

The Japanese central bank yesterday and this morning injected large amounts of cash into financial markets as Tokyo's Nikkei average fell yesterday to a three-year low. Asian markets rebounded in early trading today, with the Nikkei up more than 3 percent and Hong Kong's Hang Seng index up 7 percent, as investors reacted to news of a possible U.S. government plan to revive the stalled financial system.

In words, the Bank of Japan played down the fallout from Wall Street. "I am not concerned that the recent events will destabilize the financial system in Japan," said Shirakawa, the bank's governor. But the central bank moved aggressively to control damage to the world's second-largest economy. It agreed with the Federal Reserve on a dollar-yen swap agreement worth up to $60 billion and left the door open for more help.

"The Bank will supply U.S. dollar funds appropriately in view of the prevailing market conditions," the bank said in a statement.

Brown, the British prime minister, pledged that "we will deal with some of the problems that have arisen because of the irresponsible behavior that has happened," but he did not detail that behavior. "We are cleaning up the financial system where there have been problems, and we are going to continue taking whatever action is necessary so we have a stable financial system."

Brown was personally involved in the HBOS-Lloyds merger talks. Analysts said regulators would have blocked the deal as anti-competitive in ordinary times. "We have taken the right decision and the tough decision that was necessary to protect the stability of the financial system and to protect the depositors," Brown said.

In India, newspapers published front-page stories about employees of U.S. investment firms in Mumbai, India's financial capital, polishing up their résumés. Lehman Brothers employs about 2,500 people in India.

Analysts said one of the biggest impacts of the crisis is to undo the long-held image of the United States as a fail-safe place to invest money. Hundreds of billions of investment dollars have poured into the United States in recent years, much of it from Asian economies where a powerful culture of individual savings contrasts with the earn-and-spend philosophy of the United States.

Many of those Asian investors were feeling burned by the failure of U.S. institutions once promoted as the safest of bets. Though Asian and Middle Eastern sovereign wealth funds lavished rescue money on U.S. lenders earlier this year, those funds appeared to be showing increasing caution.

"The big risk for the United States is that people will begin to feel that we really don't know what we're doing and lose complete confidence in the Federal Reserve, the Treasury and the U.S. financial system," said Edwin M. Truman, senior fellow at the Peterson Institute and a former Treasury assistant secretary. "That hasn't happened yet, but it is a risk."

Pan reported from Moscow. Correspondents Mary Jordon in London, Craig Whitlock in Berlin, Karin Brulliard in Johannesburg, Blaine Harden in Tokyo, Ariana Eunjung Cha in Shanghai, Emily Wax in New Delhi, Ellen Knickmeyer in Yemen and Joshua Partlow in Miami contributed to this report.

View all comments that have been posted about this article.

© 2008 The Washington Post Company