Cash Transfusions To Keep Markets Pumping

Source : weekend TODAY, August 11, 2007

CENTRAL banks across the Asia-Pacific on Friday joined a global effort to restore calm to financial markets and ward off a full-blown credit crunch, even as tumbling Asian stocks mirrored sharp falls across global bourses.

The Bank of Japan (BOJ) injected one trillion yen ($12.9 billion) into the money market, while Australia's central bank pumped US$4.2 billion ($6.3 billion) into the banking system, more than twice the daily average.

Besides Singapore, South Korea's central bank, too, sought to soothe jittery markets by promising it would "promptly act" if needed — as global share prices fell amid alarm that the fallout from the United States sub-prime mortgage problems might be spreading.

Meanwhile, the European Central Bank (ECB) pumped even more money into the eurozone banking market on Friday — taking its cash injections to 155.85 billion euros ($325 billion) in two days.

Worries about the US mortgage market have caused liquidity to dry up in money markets as private banks withhold funds, prompting central banks to offer extra cash. The main concern is that if the banks become increasingly reluctant to provide funds, the broader economy will slow since businesses will not be able to finance their operations.

If that happens, there could be knock-on effect as spending and employment fall, which could prompt central banks to cut interest rates to try to head off the risk of a recession.

The move by central banks came after French bank BNP Paribas said it was freezing three funds that had exposure to US sub-prime mortgages, prompting overnight interest rates in the US and Europe to shoot up. On Thursday, the ECB had pumped in an initial sum of 94.8 billion euros — more than it did after the 911 attacks on the US rattled financial markets.

But news of the various central banks' cash injections only seemed to add to the nervousness of global markets.

The plunge in share prices spilled over into Asia. Instead of being reassured by central banks' measures, Okasan Securities strategist Hirokazu Fujiki said, investors "took it the other way ... That is, the problem is so big that the central banks had to intervene".

In Tokyo, where share prices on Friday closed down 2.37 per cent at a near five-month low, market players nevertheless welcomed the BOJ's action.

"It's about money flows ... The heart would stop beating if it does not have blood flowing," said a broker at a Japanese securities firm.

In South Korea, officials sought to reassure local investors but without marked success. The stock market closed down 4.2 per cent, the biggest percentage fall in over three years.

Sydney slumped 3.7 per cent, Hong Kong closed down 2.88 per cent, Taipei lost 2.74 per cent and Shanghai ended down 0.1 per cent.

"The fear is feeding on itself," Mr Jeffrey Kleintop, chief market strategist at LPL Financial Services, told Bloomberg. "It's what you don't know that seems to be taking over the market."

The Malaysian ringgit fell to a six-week low as investors reduced holdings of emerging-market assets. Nine of the 10 most-active Asian currencies fell, according to data compiled by Bloomberg.

But analysts said that, so far, the impact of the US housing sector woes on overall economic growth still appeared to be contained, particularly in Asia.

"I think the risk to global growth at this stage is still not significant," said Societe Generale's chief Asia economist Glenn Maguire. "We're seeing central banks do what is appropriate, and that's to supply precautionary funds to the market." — AGENCIES

US, EURO SHARES DOWN

The United States Federal Reserve pumped US$19 billion ($28.9 billion) into the banking system before stock markets opened on Friday – on top of the US$24 billion added on Thursday – and said it was prepared to inject fresh liquidity if necessary.

Even so, US shares opened sharply lower. As of 9.35am in New York, the Standard & Poor’s 500 Index lost 0.9 per cent to 1440.5, the Dow Jones Industrial Average fell 0.8 per cent to 13,162.97, while the Nasdaq Composite Index slid 1.3 per cent to 2524.06.

Countrywide Financial Corp, the biggest US mortgage lender, fell the most since 1987 after saying investor demand for its loans had dried up. Citigroup Inc, the largest US bank, and Goldman Sachs Group Inc, the biggest securities firm, also dropped.

Europe’s main stock markets, too, slumped further. London’s FTSE 100, for instance, shed 2.62 per cent in late morning trading.