By Jason Simpkins
Central banks in the United States, Europe, Australia, Japan, and Canada were in damage-control model again on Friday. A total cash infusion of approximately $135.7 billion was added banking systems worldwide in the hope of pacifying a global credit crisis that appears to be getting far worse than many experts had expected.
The European Central Bank on Friday loaned 61.05 euros ($83.6 billion), after injecting a record 94.8 billion euros ($130.6 billion) on Thursday. The Bank of Japan added 1 trillion yen ($8.5 billion), while the Reserve Bank of Australia provided $4.2 billion in relief. Central banks in Norway, Switzerland, Denmark, Indonesia, and South Korea are ready to provide additional capital, if they haven’t already.
Global financial markets have been trounced over the past several days, as it has become evident that mortgage defaults in the United States have sent shock waves rippling through the worldwide economy. A crisis involving investor confidence in the credit market was the result.
The Fed was initially willing to remain mute on the issue, but after the ECB’s $130 billion loan it didn’t have any choice but to take action Friday. It was France’s largest bank, BNP Paribas SA, that started the ball rolling Thursday when it announced, that “the complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly, regardless of their quality or credit rating.”
At that point, investor fears that the U.S. sub-prime mortgage defaults and the resultant credit crisis would seep out into the worldwide market place. Central banks must now ensure their respective banking systems have enough cash on hand to accommodate lending demand.
The actions taken seemed to have eased the minds of at least a few investors, Friday, as the market pulled itself out of a tailspin. The Dow closed down 30.16 points, which is not a good day by any stretch of the imagination, but still represented an improvement over Thursday’s drop – which was more than 10 times greater. The Nasdaq sank 11.6 points, and the S&P 500 squeaked out a slight increase.
Foreign exchanges ended their day far worse off. The pan-European Dow Jones Stoxx 600 Index dropped 2.6%, to close at 364.63. The United Kingdom’s FTSE 100 Index took the its worst hit of the year, dropping 3.7%, or 232.9 points, to close at 6,038.30. The Nikkei 225 dropped 406 points.
Speculation that the Fed may yet cut short-term interest rates has become a focus of speculation once again, after investors had essentially dismissed that possibility only days ago. But a rate reduction rate cut seems unlikely for at least another month.
Many banks have been troubled, to be sure, but this is nothing compared to the panic that will ensue should mortgage defaults spread to the prime-mortgage markets. In that case, a rate cut would be the Fed’s ace in the hole. But so long as the problem persists only in the sub-prime market, global cash infusions could be enough to settle the markets down.
However, once the unemployment figures, and the consumer and producer price indices, are released in September, Fed Chairman Ben S. Bernanke might reconsider his stance.