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GENEVA: Investor confidence is an elusive, fragile thing but as the
traumatic roller coaster ride in the markets this week makes clear,
without it, the whole financial system risks turning to dust.
The failure on Monday of US investment bank
Lehman Brothers, then the emergency sale of peer Merrill Lynch and
the US government rescue of giant insurer American International
Group (AIG) wiped hundreds of billions of dollars from the stock
market.
The $85-billion bailout of AIG was especially
damaging to confidence, with the government saying it had to take
the unprecedented step for fear its bankruptcy would cause untold
damage to the US financial system and economy.
That bailout twisted even tighter the credit
crunch at the heart of the current turmoil, with banks in need
unable to find fresh funds while their counterparts who had cash,
refused to lend it out for risk of more losses.
“It seems like the money that used to be
around has disappeared but it hasn’t disappeared, it’s just
being held back,” said Jan-Egbert Sturm, director of the KOF Swiss
Economic Institute.
To escape the impasse, the central banks poured
hundreds of billions of dollars into the money markets in an effort
to head off another failure that could have completely destabilized
the global financial system.
“There is extreme discrimination now; some
banks have to pay sharply higher interest rates to get money, some
don’t get any money at all. It’s a systemic problem that only
central banks can solve,” Credit Suisse analyst Marcel Thieliant
said.
By Thursday, reflecting the issues at stake, the
amounts involved had become huge—the US Federal Reserve offered
$180 billion to relieve “elevated pressures” in global markets
and promised another $50 billion.
The Fed was also joined by the European Central
Bank along with Britain, Japan, Switzerland and Canada in offering
to swap currencies for dollars, taking the total to more than $300
billion.
Not only was the sum colossal, the fact that
central banks such as Canada and Japan, which normally release
liquidity in their own currencies, were releasing liquidity in US
dollars, was significant.
This means that foreign subsidiaries of US
financial institutions, for instance, could get access to US dollars
at all times.
In this way, the central bankers around the
world this week stood as lenders of ‘last resort,’ making
available the funds necessary to save the wider financial system
when no one else could.
“At a time when the issue of trust and
confidence is of utmost importance, it does not help to let other
banks or investors know that one is turning to the [US] Treasury for
funds. By offering US dollars around the world, it makes it easier
for banks to circumvent this problem,” Sturm said.
On Friday, news of a US government plan to
cordon off the toxic debt and dead housing loans at the root of the
current problems saw stock markets soar around the world.
There were massive gains in the banks as
investors looked for bargains among the beaten down financials,
reassured that the US and other governments would now do what it
takes to stop the rot.
-- AFP
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