WASHINGTON/SYDNEY (Reuters) - The Federal Reserve on Wednesday moved for the second time within 24 hours to keep the wheels of the financial world turning, this time acting in concert with Australia and Scandinavia to supply money markets with $30 billion in funds.
The European Central Bank, the Bank of England, the Bank of Japan and Australia’s central bank have also once again injected billions of dollars into their banking systems to stop banks from hoarding cash.
The Fed set up currency swaps with central banks in Australia, Denmark, Norway and Sweden, marking its latest bid to ease global credit market strains on top of $247 billion already committed to currency swaps with other big banks.
“These facilities, like those already in place with other central banks, are designed to improve liquidity conditions in global financial markets,” the Fed said.
Once a byword for safety and liquidity, the short-term lending market in which banks lend to each other has repeatedly seized up in the financial crisis because of increasing worries over the creditworthiness of borrowers.
The moves follow a rout in financial markets, gripped by fears of more Wall Street failures after Lehman Brothers filed for bankruptcy, Merrill Lynch lost its independence, insurer AIG was saved in a $85 billion bailout and Morgan Stanley and Goldman Sachs ceased to operate as investment banks.
The ECB and the Bank of England offered up to $40 billion in dollar overnight funds each. The offers followed an earlier Bank of Japan 1.5 trillion yen ($14.2 billion) injection and the Reserve Bank of Australia’s A$815 million ($680 million) cash supply.
As part of a global central bank effort to deal with dollar shortage, Japan’s central bank also offered $30 billion in one-month funds to easy the money market funding squeeze.
Overnight dollar rates held steady between 2.5-3.5 percent in light trade in Asia on Wednesday after central bank moves. “I reckon everyone is reducing activity with the market still jittery,” said a trader in Singapore.
The rates came off a about 10 percent hit last week, but still held above the Federal Reserve’s 2 percent target.
On Tuesday, the ECB offered banks $65 billion in liquidity, the Swiss National Bank $18 billion, and the Federal Reserve added $20 billion, subduing U.S. overnight rates even though longer term lending between banks remained fraught with tension.
The moves came as Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson urged the U.S. Congress to act swiftly on a $700 billion bailout plan for U.S. financial firms or face dire economic consequences.
U.S. President George W. Bush, giving his farewell speech to the United Nations, offered assurances of his commitment to stabilising world markets but faced criticism over the excesses of global capitalism that Washington has long pushed as the path to economic prosperity.
Australian Prime Minister Kevin Rudd on Tuesday met Federal and the World Bank officials to discuss the turmoil and said the world needs a U.S. bailout to be enacted quickly and the plan in Washington was a “good and strong” measure.
“We welcome this package, it is a good and strong measure from the U.S. administration at a time when global financial markets are under considerable stress,” he told reporters after meeting World Bank President Robert Zoellick.
The International Monetary Fund said Australia can handle the slowdown in world growth, adding that its central bank’s decision to ease policy in the face of market turmoil was welcome.
South Korea’s prime minister said he was “very much worried” about the financial mayhem in the United States but added that his country’s banks were healthier and its foreign reserves deeper than they were during the 1997 Asian financial crisis.
“We are ready for any kind of eventuality, but still the U.S. is the strongest economy in the world and when it goes through very difficult times, not only Korea but all the economies naturally are affected,” Prime Minister Han Seung-soo said.
“We’d like to see the U.S. mend its own house as soon as possible so the impact on other countries will be minimized in due course,” he told Reuters in an interview.
Writing by Jan Dahinten; Editing by Tomasz Janowski