The main front page article in the Guardian yesterday had the headline "Banks act on meltdown fear", but the article itself (at http://www.guardian.co.uk/business/2007/dec/13/bankofenglandgovernor.creditcrunch) didn't actually mention "meltdown" of the financial markets. In my opinion, there will be (sooner or later) some sort of massive meltdown, rather than just a recession.
The unprecedented cooperation by five central banks (European and of the UK, US, Canada and Switzerland) on Wednesday promising to lend a total of $100 billion (£50 billion) will not stop the problem of the credit crunch. The media was rather reluctant to reveal precise details of this intervention, but after reading a few different Guardian and Independent articles yesterday, I found out that the £10 billion (or perhaps £11 billion) promised by the Bank of England would only last for three months, after which presumably they will demand the money back. There will be two auctions, and presumably any banks bidding for the loans will be revealing that they are in financial difficulties, because the results of the auctions will be made public (and the facts will come out anyway if the media/banks try to hide the loans, like they did for up to £5 billion to Barclays in the summer). Although this money will be lent at the normal interest rate, rather than the penal rate they offered in the wake of Northern Rock's problems, banks may similarly be put off participating in the auctions.
The money the US Federal Reserve is offering would only be for a period of one month!
No wonder banking shares remained stable on Wednesday (with only slight increases or decreases, and Barclays having no change at all) and plummetted yesterday (see the Financial Times article below).
The FT article does not mention the Halifax Bank of Scotland (HBOS), whose shares fell 8% yesterday on news of a supposed £180 million loss due to the credit crunch. Just as Switzerland's largest bank UBS announced much bigger losses than they previously claimed, investors don't seem to believe the HBOS figures - and Barclays' 5.9% fall yesterday indicates that they still don't believe their supposed £1.3 billion "write-down" due to the credit crunch. As I have previously pointed out, Barclays have assets and liablities of around £1,800 billion, and a lower profit margin (on 2006 figures).
Shares tumble on worries over bank measures
By FT reporters
Published: December 14 2007 02:00 | Last updated: December 14 2007 02:00
UK shares suffered their biggest fall since the height of the summer credit turmoil as investor doubts mounted over whether sweeping measures by the world's central banks to tackle the credit crunch in financial markets would be sufficient to defuse the crisis.
The FTSE 100 accelerated its decline at the end of an extremely volatile day to close down 195.6 points - nearly 3 per cent - at 6,364.2.
It was only the fourth time the index has fallen as much as 3 per cent in a day since 2003. Banking stocks led the rout, with Barclays losing 5.9 per cent and Royal Bank of Scotland 6.2 per cent.
Shares in Asia and elsewhere in Europe were also hit hard as analysts warned that the planned intervention by central banks announced on Wednesday looked relatively modest compared with the scale of the problem - not least because there are signs that losses at big financial institutions are continuing to mount. US shares also sagged.
"What the programme will not do is cure the cancer that got us here in the first place, the [US] housing bust and the collapse in credit conditions," said William O'Donnell, strategist at UBS.
Central bankers attempted to counter investor concerns by stressing a willingness to intervene more radically if necessary.
Paul Tucker, Bank of England head of markets, said the co-ordinated action was one of a series of policies needed to relieve pressure in financing markets.
"We must try to avoid a vicious circle in which tighter liquidity conditions, lower asset values, impaired capital resources, reduced credit supply and slower aggregate demand feed back on each other," he said.
However, the cost of borrowing funds in the European and US money markets remained close to seven-year highs.
In the sterling interbank market, the cost of borrowing three- month money fell to 6.514 per cent from 6.627 per cent, while in the dollar market, three-month rates dropped to 4.990 per cent from 5.057 per cent. In the euro market, three-month funding costs barely moved, trading at 4.949 per cent, compared with 4.952 per cent on Wednesday.
Some analysts blamed this muted reaction on a "timelag" effect, coupled with uncertainty about how central banks would implement liquidity injections.
The US Federal Reserve announced on Wednesday that it would conduct a $20bn auction of funds on Monday, against an expanded range of collateral. The European Central Bank and Swiss National Bank plan to conduct currency swaps with the Fed to provide dollar funds to banks in Europe. The Bank of England and Bank of Canada also expanded the range of collateral they would accept from banks for loans.
However, other bankers expressed disappointment about the limited size and nature of the intervention plans.
The French CAC-40 index dipped 2.7 per cent while Germany's DAX retreated 1.8 per cent. The Nikkei 225 Average fell 2.5 per cent in Japan while the Hong Kong market fell by 2.7 per cent. In the US, the S&P 500 was down 0.5 per cent at 1,479 by late afternoon in New York.
By Gillian Tett, Jamie Chisholm and Lindsay Whipp in London and Michael Mackenzie in New York
--The unprecedented cooperation by five central banks (European and of the UK, US, Canada and Switzerland) on Wednesday promising to lend a total of $100 billion (£50 billion) will not stop the problem of the credit crunch. The media was rather reluctant to reveal precise details of this intervention, but after reading a few different Guardian and Independent articles yesterday, I found out that the £10 billion (or perhaps £11 billion) promised by the Bank of England would only last for three months, after which presumably they will demand the money back. There will be two auctions, and presumably any banks bidding for the loans will be revealing that they are in financial difficulties, because the results of the auctions will be made public (and the facts will come out anyway if the media/banks try to hide the loans, like they did for up to £5 billion to Barclays in the summer). Although this money will be lent at the normal interest rate, rather than the penal rate they offered in the wake of Northern Rock's problems, banks may similarly be put off participating in the auctions.
The money the US Federal Reserve is offering would only be for a period of one month!
No wonder banking shares remained stable on Wednesday (with only slight increases or decreases, and Barclays having no change at all) and plummetted yesterday (see the Financial Times article below).
The FT article does not mention the Halifax Bank of Scotland (HBOS), whose shares fell 8% yesterday on news of a supposed £180 million loss due to the credit crunch. Just as Switzerland's largest bank UBS announced much bigger losses than they previously claimed, investors don't seem to believe the HBOS figures - and Barclays' 5.9% fall yesterday indicates that they still don't believe their supposed £1.3 billion "write-down" due to the credit crunch. As I have previously pointed out, Barclays have assets and liablities of around £1,800 billion, and a lower profit margin (on 2006 figures).
Shares tumble on worries over bank measures
By FT reporters
Published: December 14 2007 02:00 | Last updated: December 14 2007 02:00
UK shares suffered their biggest fall since the height of the summer credit turmoil as investor doubts mounted over whether sweeping measures by the world's central banks to tackle the credit crunch in financial markets would be sufficient to defuse the crisis.
The FTSE 100 accelerated its decline at the end of an extremely volatile day to close down 195.6 points - nearly 3 per cent - at 6,364.2.
It was only the fourth time the index has fallen as much as 3 per cent in a day since 2003. Banking stocks led the rout, with Barclays losing 5.9 per cent and Royal Bank of Scotland 6.2 per cent.
Shares in Asia and elsewhere in Europe were also hit hard as analysts warned that the planned intervention by central banks announced on Wednesday looked relatively modest compared with the scale of the problem - not least because there are signs that losses at big financial institutions are continuing to mount. US shares also sagged.
"What the programme will not do is cure the cancer that got us here in the first place, the [US] housing bust and the collapse in credit conditions," said William O'Donnell, strategist at UBS.
Central bankers attempted to counter investor concerns by stressing a willingness to intervene more radically if necessary.
Paul Tucker, Bank of England head of markets, said the co-ordinated action was one of a series of policies needed to relieve pressure in financing markets.
"We must try to avoid a vicious circle in which tighter liquidity conditions, lower asset values, impaired capital resources, reduced credit supply and slower aggregate demand feed back on each other," he said.
However, the cost of borrowing funds in the European and US money markets remained close to seven-year highs.
In the sterling interbank market, the cost of borrowing three- month money fell to 6.514 per cent from 6.627 per cent, while in the dollar market, three-month rates dropped to 4.990 per cent from 5.057 per cent. In the euro market, three-month funding costs barely moved, trading at 4.949 per cent, compared with 4.952 per cent on Wednesday.
Some analysts blamed this muted reaction on a "timelag" effect, coupled with uncertainty about how central banks would implement liquidity injections.
The US Federal Reserve announced on Wednesday that it would conduct a $20bn auction of funds on Monday, against an expanded range of collateral. The European Central Bank and Swiss National Bank plan to conduct currency swaps with the Fed to provide dollar funds to banks in Europe. The Bank of England and Bank of Canada also expanded the range of collateral they would accept from banks for loans.
However, other bankers expressed disappointment about the limited size and nature of the intervention plans.
The French CAC-40 index dipped 2.7 per cent while Germany's DAX retreated 1.8 per cent. The Nikkei 225 Average fell 2.5 per cent in Japan while the Hong Kong market fell by 2.7 per cent. In the US, the S&P 500 was down 0.5 per cent at 1,479 by late afternoon in New York.
By Gillian Tett, Jamie Chisholm and Lindsay Whipp in London and Michael Mackenzie in New York
Steve Wallis (Glasgow, Scotland)
For important/urgent communications, please email: warcrysteve@...
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For discussion of the credit crunch which may cause Barclays Bank to become bankrupt, go to http://www.revolutionaryplatform.net/forum/index.php?board=156
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