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INSTANT VIEW: World central banks in coordinated action

LONDON/SINGAPORE (Reuters) - The world’s leading central banks, including the Federal Reserve, offered on Thursday to pump billions of dollars into global money markets to ease a dollar funding crunch triggered by the upheaval on Wall Street.

The coordinated action also involved the European Central Bank, the Bank of Japan, the Bank of England, the Bank of Canada and the Swiss National Bank.

A series of announcements from the central banks had an immediate impact on overnight U.S. dollar quotes, which dropped sharply to 2.0 percent from rates of nearly 8 percent traded earlier on Thursday in Asia.

COMMENTARY

JOSEPH KRAFT, HEAD OF CAPITAL MARKETS JAPAN, DRESDNER

KLEINWORT, TOKYO

“The coordinated funding operation will be effective in helping to relieve negative sentiment in the market to some extent and is also a positive step in addressing the issue of dollar funding shortages.

“But it is not a fundamental solution to the broader financial problems, and does not ease worries weighing on market sentiment such as the issue of individual financial institutions and sharp declines in the stock markets.”

HIROMICHI SHIRAKAWA, CHIEF ECONOMIST, CREDIT SUISSE, TOKYO

“The coordinated action was to prevent systemic risks in global financial markets. It would be wrong to assume just from recent developments that there will be a coordinated move by central banks on interest rate policy.

“While a provision of liquidity is based on a short-term assessment of the situation, interest rate policy is based on the economic outlook for the next year or so.

“A coordinated interest rate action is unlikely unless the central banks sharply cut their assessments for their respective economies for 2009.”

THOMAS MAYER, DEUTSCHE BANK

“This is a global financial crisis so it is correct that we are seeing a global response. They will have to keep doing it (injecting funds).”

“Huge chunks of assets have become illiquid so banks are crowding the central banks.”

“This is not just a little storm in a teacup. If a body dehydrates it falls over and if it gets worse it can die. Likewise the financial system is starved of liquidity right now so the central banks will have to keep providing it.”

“It (turmoil) is eventually have a deflationary impact and central banks will have to address this. The European Central Bank has considerable room to move and they will have to use it.”

“I think it will take them some time though. They have a different view of the world. They (the ECB) will have to wait for evidence that this is causing damage to the real economy which will not be obvious straight away.”

“You can do some fine tuning to help liquid but you can’t separate that from monetary policy. You have to give liquidity at a reasonable price like you have to quench the thirst if the body is dehydrated.”

MASAMICHI ADACHI, SENIOR ECONOMIST, JPMORGAN, TOKYO

“The action will not solve the fundamental problems causing the global financial turmoil but will ease worries about the liquidity squeeze. But market jitters will likely continue as this will not completely allay fears about the U.S. financial sector.

“The action shows how serious the problem is. To solve the problem, there needs to be greater clarity about the type of cases where the U.S. government will provide help, and ultimately, there needs to be signs of a halt to the downturns in the U.S. housing market and U.S. economy.”

TAKESHI MINAMI, CHIEF ECONOMIST, NORINCHUKIN RESEARCH

INSTITUTE, TOKYO

“The arrangement should help calm down unrest on dollar money markets where financial institutions were faced with growing difficulty in raising funds due to strong wariness about creditworthiness.

“But this kind of facility can serve only as a stop-gap measure and it won’t resolve the credit crisis. The focus is now whether the U.S. government changes its stance about the use of taxpayer’s money in resolving the under-capitalization problem at U.S. financial institutions.”

IZURU KATO, CHIEF ECONOMIST, TOTAN RESEARCH, TOKYO

“The move was intended for central banks to show a coordinated stance against a plunge in the dollar and prevent investors from taking flight from the dollar. A rapid fall in the dollar could prompt them to carry out joint intervention.

“The Bank of Japan responded well to market expectations for dollar fund supply as the liquidity has dwindled in foreign currency swap markets since Lehman Brothers collapsed.

“The measures will help ease the ill effects from global financial turmoil from spreading. But ultimately, the U.S. authorities will have to resort to taxpayer money to dispose of mortgages that have turned sour in order to settle turbulence in financial systems.”

JACQUES CAILLOUX, RBS ECONOMICS, LONDON

“The announcement also suggests that central banks stand ready to inject additional liquidity as long as long will be needed: these operations are ‘intended to continue the provision of US dollar liquidity for as long as needed in view of the prevailing market conditions’.

These operations are part and parcel of the liquidity injection measures that central banks have recently stepped up in an attempt to restore confidence in the inter bank market. The ECB has shown no intention to respond to the current crisis by lowering the policy rate and will likely continue to focus on the need for liquidity in the system either in euros or dollars.”

TOSHIYUKI SUZUKI, SENIOR MANAGER OF INTERNATIONAL TREASURY

DEPARTMENT AT BANK OF TOKYO-MITSUBISHI UFJ, TOKYO

“The amount they announced they would fund is large enough to alleviate market worries about a near-term daily funding shortage.

“The action may soothe concerns about banks’ dollar funding problems but it is not enough to solve the real problem causing the U.S. banking system crisis. That is a lack of capital at banks.

“As long as we are missing action against a lack of capital at financial firms, the impact from today’s policy coordination will be limited.”

CHRIS TURNER, ING FINANCIAL MARKETS, LONDON

“Arguably, it would have been good to have these measures earlier in the week, potentially avoiding the spike in overnight rates (e.g. USD overnight rates spiked to 8% on Tuesday), which sent those banks dependent on wholesale funding, e.g. HBOS into a tail-spin.

However, we believe today’s liquidity measures are effectively damage limitation. Certainly similar moves on March 11th did not prevent the S&P hitting a new low and the equity market only stabilized when the Fed cut rates 75bp a week later on March 18th.

These measures address funding difficulties, but of course do not address the primary risk of further bank write-downs. Notably Lehman’s bankruptcy resulted in price discovery’, with its sub-prime and Alt-A MBS portfolio effectively worth only half what it had marked it at on its balance sheet. Price discovery prompted the ratings downgrade that spelled the end for AIG. And the prospect of further write downs will no doubt keep the financial sector under pressure and bring forward the prospect of a 50bp Fed rate cut. Expect risk aversion to remain high and the USD to ease across the board once it becomes clear the Fed will ease again.”

MARC OSTWALD, STRATEGIST, MONUMENT SECURITIES, LONDON:

“It’s the inevitable action of central banks trying to regain control of the market, and they’ve identified that the dollar market as the problematic one.

“It is a huge injection of liquidity ... The question is whether this will restore control.

“This should help, but I’m not sure of the permanency of it. We’ve seen so many of these interventions over the past year.”

(On slide in overnight dollar interbank rates)

“The rate looks to have come back down near to where it should be ... the question will be whether this will keep the whole of the curve calm.”

“As long as there isn’t any nasty feedback higher along the curve, then things can be assumed to be getting under better control.”

Reporting by Singapore, London, Tokyo

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