Credit market far from tossing away its crutches

By Ros Krasny - Analysis

CHICAGO (Reuters) - New Federal Reserve liquidity measures announced on Wednesday continue the process of healing for severely injured global credit markets, but a happier day will be when the market can toss away its crutches for good.

The positive reception to moves by the Fed, ECB and Swiss National Bank in currency, equities, and credit markets was short-lived in Wednesday trading, underlining how brittle the financial system remains.

"This latest I.V. keeps the patient in stable but not critical condition, but not ready for discharge," said Doug Roberts, chief investment strategist at Channel Capital Research in Shrewsbury, New Jersey.

By various measures the credit crisis of the past year is still raging, or in the Fed's words, conditions remain unusual, exigent and fragile.

The U.S. central bank said it would continue to lend directly to investment banks by extending the Primary Dealer Credit Facility (PDCF) and the Term Securities Lending Facility (TSLF) from the originally-planned August sunset.

The Fed also announced a new program, auctions on TSLF options, for times of "elevated stress" such as the end of a quarter.

"These actions should help to somewhat alleviate market stresses, but are incremental rather than transformational," said economists at Goldman Sachs.

The PDCF gives investment banks access to the Fed's discount window for lender-of-last-resort cash. The TSLF is a series of weekly auctions of 28-day loans of Treasury securities to primary dealers.

An extension of the facilities was hinted at recently by Fed Chairman Ben Bernanke and other Fed policy-makers.

Still, it was seen as well timed ahead of major economic reports due later this week and the Federal Open Market Committee's policy meeting next Tuesday.

"It should be a plus for depository institutions and financial institutions in general," said Michael Moran, chief economist at Daiwa Securities American in New York.

The lending facilities could be around until at least the end of January, or withdrawn if circumstances change.

"The Fed was clear that these facilities (PDCF and TSLF) are temporary and will end when it judges the emergency has passed," said Marc Chandler, currency strategist at Brown Brothers Harriman in New York.

Measures such as the TED spread, the difference between Treasury bill yields and Eurodollar deposit yields, still imply high risk in the banking system.

"Some reduction of uncertainty in the banking sector is a prerequisite, but right now it seems another shoe is falling every other day," said Channel Capital's Roberts. The sector could take years to fully right itself, he added.