Cbanks boost efforts but US lawmakers reject bailout
WASHINGTON/FRANKFURT (Reuters) - The world's central banks redoubled their efforts on Monday to revive the paralyzed global financial system but their efforts may come to naught after U.S. lawmakers rejected a bank bailout bill.
The House of Representatives rejected by a vote of 228-205 a bill to authorize the Treasury Department to spend up to $700 billion to purchase troubled mortgage-backed bonds from banks, with the goal of jump-starting stalled capital markets.
Though faulted by many, the bill was also seen by some as the kind of measure that could resuscitate the world's bank-to-bank lending market, which is crucial to keeping the global economy alive.
News of the bill's rejection caused stocks to plummet but sent U.S. Treasuries prices soaring as investors sought the safety of government bonds, just the kind of risk-averse flight to quality that officials have been trying to unwind.
"Now the credit markets are going to be even more frozen," Bill Gross, chief investment officer of Pacific Investment Management Co, told CNBC television.
News of the House vote followed the Federal Reserve's announcement of a $330 billion expansion to arrangements aimed at boosting U.S. dollar liquidity throughout the global financial system to counteract a world financial crisis emanating from last year's mortgage meltdown in the United States.
The action increased reciprocal swap lines with the European Central Bank and eight other central banks to $620 billion from $290 billion previously.
Earlier on Monday, European and Asian central banks had already been busy pumping more money into the sclerotic world banking system in an effort to persuade financial firms to stop hoarding cash, which threatens to bring the global economy to a halt.
The efforts showed the heightened tensions in interbank lending as the approaching end of the financial quarter compounds the scramble for cash.
Global money markets remained under severe stress and the world's financial system appeared to be edging closer to the brink of collapse. Authorities in Europe and the United States struggled to keep banks afloat through injections of cash, nationalizations and mergers of necessity.
London interbank offered rates for three-month euro funds and the premium for borrowing euros over anticipated official policy rates rose to their highest ever since the currency was launched almost a decade ago.
The Fed refrained from open market operations during U.S. the trading day but said it would expand efforts to head off a possible year-end cash crunch at financial institutions.
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The increased central bank swap lines will allow dollar liquidity of up to $240 billion provided by the ECB, $30 billion by the Bank of Canada, $80 billion by the Bank of England, $120 billion by the Bank of Japan, $15 billion by Danish central bank, $15 billion by Norway's central bank, $30 billion by the Reserve Bank of Australia, $30 billion by the Swedish central bank and $60 billion by the Swiss National Bank.
Still, the failure of the rescue bill in the House removed any confidence inspired by the renewed central bank measures.
Reflecting the deep disquiet in the money market, the closely-watched TED spread, or the difference between market-based dollar deposit rates and three-month U.S. government borrowing rates, was at 371 basis points in late New York trade, a level which is considered highly elevated.
"There's panic and a lot of fear," said Haag Sherman, co-founder and managing director of Salient Partners in Houston. "I think our country's balance sheet looks like that of a third world country and our government looks like that of a third world country."
