World banks fight credit crunch with £122.5 billion

12 March 2008 / by Joy Tibbs
Several of the world's major central banks pledged to inject billions of dollars into the financial markets in order to prevent a global recession yesterday.

It is hoped that funds from the five banks – the Federal Reserve (Fed), the European Central Bank, the Bank of England and the Banks of Canada and the Swiss National Bank – will give markets a vital boost and will encourage lending between financial institutions.

"Since the coordinated actions taken in December 2007, the G-10 central banks have continued to work together closely and to consult regularly on liquidity pressures in funding markets," said the Fed in a statement.

"Pressures in some of these markets have recently increased again. We all continue to work together and will take appropriate steps to address those liquidity pressures."

The Fed is set to make the greatest contribution, claiming it will auction US Government bonds worth $200 billion (£100 billion) to provide loans for a 28-day period, while the Bank of England said it would lend £10 billion in three-month loans for London banks, which will become available on March 18. It will inject further funds next month but has not yet disclosed the value of these loans.

Meanwhile, the European Central Bank has pledged to lend approximately £7.5 billion in 28-day loans; the Swiss National Bank will auction £3 billion and the Bank of Canada is set to offer approximately £2 billion.

The banks hope that by making money and safe Government bonds available, lending between banks, which has fallen since the US sub-prime crisis hit, will resume. However, although stock markets, including the FTSE climbed on the back of these revelations, many remain sceptical about the impact of the loans, viewing them as a measure that is too little, too late.

David Rosenberg, economist at financial management company Merrill Lynch said in a research note: "As with the other liquidity measures introduced, the new facility will not alleviate the current credit crunch or economic recession."

"The size of the auctions, while sizable in terms of the Fed's balance sheet, are actually fairly small in light of the overall credit situation and in no way does this solve – or is intended to solve – the massive write downs and losses in the banking sector that are ongoing in this cycle."

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