From Staff Reports
Central banks in Europe, Asia and the U.S. injected more cash into the global financial markets yesterday (Tuesday),.
The European Central Bank placed $370.6 billion in its normal weekly refinancing, adding to emergency maneuvers it’s undertaken over the past few weeks. The U.S. Federal Reserve followed up with another $3.75 billion, the newest round of moves that have now exceeded $100 billion since last week. U.S. Treasury Secretary Henry Paulson said the United States will successfully navigate the credit crunch caused by the subprime meltdown.
The Bank of Japan yesterday opted to lend another $7.01 billion after an injection of $8.71 billion on Monday. The Reserve Bank of Australia lent banks $3.64 billion, while the Bank of England lent $622.3 billion – its first emergency loan since the subprime credit crisis began. [For a report from our global financial expert Martin Hutchinson on how to navigate the credit crisis – avoiding the fallout and perhaps even finding ways to profit – click here].
The credit crunch started with rising defaults in U.S. subprime mortgages – home loans made to homebuyers with generally poor credit histories. But the crisis has spread so quickly because banks and hedge funds all over the world invested in this high-risk debt to a much-greater degree than anyone believed. In many cases, the banks really had no business making these investments – especially those in Germany and France.
The effects have been felt in Europe, especially in Germany, where state-owned wholesale bank Landesbank Sachsen has said it would need a $23.3 billion credit line bailout, thanks to its exposure to the U.S. subprime credit business.
That exposure – as well as the problems at IKB Deutsche Industriebank AG (FRA: IKB), which relied on several banks to protect it from its $11 billion subprime exposure, has really rattled investors, who almost feel as if they don’t know where the next lightning bolt will strike.
Then, at a European banking symposium Monday, Alexander Stuhlmann, the chief executive of German state-owned bank, WestLB AG, said there could be a major financial crisis in Europe’s No. 1 economy if credit issues persist. Stuhlmann warned that foreign financial institutions were increasingly reluctant to extend credit to financial institutions in Germany, which could cause major problems.
"We sense reluctance on the part of foreign partners to extend credit to German banks," Stuhlmann told journalists during an impromptu chat on the sidelines of the banking event, wire services reported. “If we have a banking crisis in Germany with other countries cutting us off, then other banks will also face difficulties.”
German Finance Minister Peer Steinbrueck was more optimistic, denying there were any signs of such fallout, and adding that he believed “those involved have the situation in hand.”
Interestingly, a poll of German sentiment among institutional investors dropped to its lowest level in a year, according to the ZEW Institute.