Asian Central Banks Throw Money at Seized-Up Credit Markets

Oh, we are in for a wild ride today. Oddly, the reaction in Pacific rim stock markets seems comparatively subdued (the Nikkei is down only 134 points, but the Hang Seng has fallen over 2%), but the credit markets are stumbling badly. Central banks are rushing to the rescue, but their efforts aren’t having much effect.

From Reuters:

Central banks across Asia scrambled on Friday to meet a desperate demand for cash, both in their own currencies and the U.S. dollar, as the White House’s $700 billion bailout plan ran into unexpected roadblocks.

News of the biggest ever U.S. bank failure only added to the thirst for liquidity, with the government brokering a last-ditch purchase of thrift Washington Mutual

“The market is just frozen at the moment,” said Claudio Piron, a strategist at JPMorgan Chase Bank in Singapore.

“We are at such a point of absent liquidity that prices are beginning to fail in their usefulness as a signal – this in itself is disturbing,” Piron said.

Overnight dollar funds remained in a broad 2.5-3.5 percent range in Asia, bankers in Singapore said. Short-term lending rates in local currencies jumped with Singapore dollar overnight rates at 2 percent, their highest since end-January…

With commercial banks everywhere hoarding cash and reluctant to lend to each other, central banks were increasingly stepping in to fill the void.

The Reserve Bank of Australia (RBA) launched its first ever repurchase operation in U.S. dollars and all $10 billion on offer was hungrily snapped up at 3.165 percent, well above the minimum bid rate of 2.35 percent.

The RBA established a U.S. dollar swap line with the Federal Reserve earlier in the week, aimed at meeting strong demand for U.S. dollars during Asian trading hours.

In South Korea, the Finance Ministry said it would inject $10 billion or more into the local swap market until the middle of October to stave off persistent dollar funding shortages.

The RBA and the Bank of Japan also kept adding extra cash to their own banking systems on Friday, while Vietnam lifted the rate it pays on bank reserves to reduce the cost of borrowing.

Yet these sums paled into insignificance compared to the U.S. Federal Reserve’s largesse.

Figures released late Thursday showed U.S. institutions borrowed from the Fed $188 billion per day on average in the latest week, almost four times the previous record.

“This looks like the balance sheet of a central bank that is keeping the financial system on life support,” said Michael Feroli, U.S. economist with JPMorgan in New York.

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  1. Anonymous

    This goes to the cut rate crowd. How can they do that and maintain even the illusion of control or credibility?

    They cannot keep it where they are supposed to be now, even opening “branches” all over the world.

    If they cut rates, what is supposed to happen? The emperor is not wearing any clothing…

  2. bg

    Anybody who believes in efficient markets should watch the stock indexes around the world over the last year. stock markets have consistently reacted much slower than credit spreads.

  3. Richard Kline

    The Emperor isn’t wearing any clothes, any skin, and a lot of meat is gone from the extremities: the zombies got to him, though he’s still crawling on. . . . Market shut down for today (Friday)? Might make a lot more sense. But in the end, the markets _will_ come down, and the efforts for going on fifteen months to prop them up only guarantee that their decline to appropriate price levels will no be maximally disorderly in trajectory.

  4. dh

    Fed Fund Rate to Zero… they should take the drama out of this and just do it all in one shot

    Re: “Holding the Fed funds rate steady at 2 percent was the right thing to do, while our colleagues at the New York Fed and at the Treasury turned to dealing with the risk of AIG and other choke points in the markets,” Fisher said. He had dissented in favor of tighter policy on five votes this year by the rate- setting Federal Open Market Committee

  5. Anonymous

    Will 0% interest rate and the $700B ease (don’t expect to solve) liquidity problem? At least for 3 months? If so, are they worth?

    Once the interest rate goes to 0%, and given that economy is likely to be deflationary in the short-term, what weapon does Fed have to reflate later??


  6. Anonymous

    A Korean official said there is no reason for an average person to panic over exchange rate because Foreign MONEY Market (or Swap market) is “separate” from Foreign EXCHANGE market. He says while US$ supply is tight in Foreign Money Market, it is not in Foreign Exchange market.

    Does this make any sense to you? If US$ is not tight in Foreign Exchange market, why don’t commercial banks use that market to get US$?? And whouldn’t that make US$ expensive for layman??

  7. Anonymous

    It’s not just the big commercial banks hoarding cash. One of my clients is a small midwestern bank. I overheard their staff getting marching orders yesterday. They were told to pull back in all of their overnight money and attempt to get several million more from whatever sources possible.

  8. Matt Dubuque

    Matthew Dubuque

    The consequences of EVERYONE hoarding cash is not inflationary.

    Just the opposite.

    The highly likely Global Depression will take years, indeed generations to overcome.

    All of us need to stay rested and healthy because we will all need to make the best decisions of our lives to cope with what is coming down.

    Turn off the television. Get offline and get outside.

    There is much more to life than money. There is joy in the laughter of children.

    Appreciate that. It is the true value of life.

    Matthew Dubuque

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