Central banks around the world started injecting enormous quantities of money into the credit markets aimed at fending off what some economists say is a looming global recession. Following a dramatic cut by the Reserve Bank of Australia yesterday, analysts said they were hopeful that central banks in the US, the UK and continental Europe would follow suit. But the same could not be said of Europe's efforts to cobble together a US-style rescue package to plug the deepening hole in balance sheets of the continent's banks. Concerns remained that even if Europe's central bank finally relented with a rate cut of its own, Europe would be unable to piece together the kind of massive rescue package that the US government pushed through Congress last week and that analysts say is critical to resuscitating the global banking sector. "Markets are in general not convinced Europe can muster a bailout package like we saw in the US," said Joseph Tan, the chief economist and strategist at Credit Suisse Private Banking in Singapore.
Following the effective nationalisation of the Dutch-Belgian bank and insurance group Fortis, Iceland's government stepped in to take over the country's second-largest bank, Landsbanki, and UK banking shares tumbled amid reports that some had asked for financial aid from the British government. But after taking steps to guarantee bank deposits, European finance ministers meeting in Luxembourg failed to come up with a unified response to the problems besetting their banks, rejecting calls from France and Italy for a US-style rescue package.
The main problem for the EU is that, while it has a unified central bank to set monetary policy, its 27 member nations have no unified fiscal structure like the US Treasury that could come up with a continent-wide programme for buying up bad debts and other illiquid assets. Instead, analysts say, each country will have to come up with its own version of a rescue effort, which may not be large enough or comprehensive enough to handle the scale of problems that have built up at Europe's big global banks.
Australia's central bank kicked off what analysts said they hoped was a co-ordinated easing of global interest rates, slashing its benchmark rate yesterday by a full percentage point in its biggest reduction in the cost of borrowing in 16 years. The move helped reverse a sharp decline across many Asian markets. Analysts are now expecting similar moves this week by the Bank of England, the US Federal Reserve and the European Central Bank.
Until recently, most central bankers were too concerned with inflation to consider lowering rates, particularly in Europe, where inflation is the fear, not lack of growth. But since an implosion on Wall Street last month that claimed Lehman Brothers, Washington Mutual and Wachovia and that turned Goldman Sachs and Morgan Stanley into mainstream commercial banks, the bigger concern now among authorities is that a sudden shortage of credit could suffocate businesses worldwide, causing a global recession and widespread job losses.
The Federal Reserve is now considering expanding its lending facility to include buying the short-term debt of companies without any collateral to back it. Companies usually sell such unsecured commercial paper to banks, but that avenue of funding has dried up as the credit crunch has deepened, threatening to force many companies to default as their existing debts come due. Calls for some kind of co-ordinated international response to the crisis are growing. The International Monetary Fund last week called for an orchestrated European response while the Russian President Dmitry Medvedev issued a televised call for concerted action. Mr Medvedev said he planned to join European leaders in France today to discuss solutions. Russia's stock market has plummeted in recent weeks as international investors flee emerging markets. Moscow's benchmark index fell by 15 per cent on Monday.
While foreign investors have been exiting emerging markets for weeks, analysts said much of the selling was the result of hedge funds taking profits to offset losses in western markets. More recently, however, the collapses on Wall Street have accelerated a retreat from riskier markets into safer assets such as gold and government bonds. Most emerging-market financial institutions have only limited exposure to the kind of mortgage-backed assets that have been toppling big western banks.
But this week has ushered in an atmosphere of panic in emerging markets, as investors realise that a shortage of global liquidity and a likely recession in the world's three biggest economies would likely sap once fast-growing emerging economies. The selling, analysts said, appeared to be falling hardest on those markets where inflation and current account deficits left authorities with less latitude to cut interest rates. Lower rates tend to exacerbate price increases by making money cheaper.
India's central bank, for example, said last night it was lowering the amount of cash the country's banks were required to keep in their vaults, thereby allowing them to lend more out to the country's fast-growing economy. But analysts said double-digit inflation was likely to keep the Reserve Bank of India from actually lowering interest rates. In China, on the other hand, analysts said austerity measures had managed to quell inflation to some extent, putting Beijing in a position to loosen monetary policy to mute the impact of slower global growth and demand for China's exports. After relaxing limits on lending, cutting interest rates and organising a fiscal stimulus package, China eased on Monday restrictions on corporate bond sales.
warnold@thenational.ae