New global crisis plans should thaw credit markets

It all smacks of Problem-Reaction-Solution whereby they rig the markets to respond positively to the announcement forthcoming of more unprecedented increased nationalization of banking and finance. Then they will claim justification for even greater level of centralization and control at the regional/global level with fake promises that it will prevent this from ever happening again. At least that's how the Federal Reserve was successfully marketed to the public. Why create new ruses when the same old same old seems to always work so well?

By Chris Sanders - Analysis

Sun Oct 12, 2008 7:33pm EDT

NEW YORK (Reuters) - Last-ditch efforts to unclog credit markets and halt a record slide in stock markets from Tokyo to Wall Street should ease serious strains in the global financial system, but the devil will be in the details.

Governments in Europe were the latest to craft a response to the crisis, before fearful world markets reopened for the week, with a pledge on Sunday to pump public money into banks battered by the worst financial crisis since the 1930s.

The unprecedented European action follows a similar effort in the United States where the government said on Friday it is developing plans to buy stakes in financial institutions.

It also comes on the heels of a British plan to pour up to 50 billion pounds ($86 billion) into its banks and underwrite interbank lending.

Markets responded positively to the broader strategy with U.S. stock index futures surging after the market opened Sunday night, while the U.S. dollar lost some of the safe-haven appeal it had seen in recent weeks.

"This is a step in the right direction. Banking guarantees are nothing new, similar measures were already taken by some European governments. But this should help stabilize European markets next week," said Kathy Lien, head of currency research at GFT Forex in New York and speaking of Europe's plan.

"It seems central banks and the finance leaders are finally beginning to move in a coordinated manner," she added.

Aside from coordination, some analysts said the European plan in particular attacked core issues behind faltering banks and credit markets.

"The measures address the key issues of recapitalization, liquidity and funding," said Marco Annunziata, chief economist for Italian bank UniCredit in London.

He added that integral steps include guaranteeing new medium-term bank debt and a suspension, or weakening, of mark-to-market accounting, and he called the effort "concrete, decisive and well-targeted" and reassuring for shaky markets.

Despite the applause, significant questions remain about how the strategy will be played out.

"The only issue is how they recapitalize the banks. Will the governments be running the banks or not? It's a big difference whether you act with the management of the banks or not," said Thomas Stolper, a currency strategist with Goldman Sachs in London.

The European plan backed by the 15 countries that share the euro currency included state guarantees for new medium-term bank debt, state injections of capital into banks and help from the ECB to unfreeze commercial paper markets, which would provide companies with vital access to funding and help stave off an economic slump.

The weekend of pledged efforts follows one of the worst weeks on record for stock markets around the world. The Standard & Poor's 500 index tumbled more than 18 percent last week in its worst weekly fall ever while European stocks plunged 22 percent and Tokyo's Nikkei crashed 24 percent.

Money markets, where businesses raise cash to fund everything from payrolls to acquisitions, are rapidly shrinking and now need regular, massive injections of emergency money from central banks across the globe.

Banks themselves, unable to separate the weak from the strong, are not lending to each other.

The real test will be whether 3-month U.S. dollar Libor, the rate that banks charge each other for loans, fixes at a lower level on Monday after trading at seriously elevated levels in recent weeks.

"At some point in time there has to be evidence that banks are lending again," said John McCarthy, vice president of foreign exchange at ING Capital Markets in New York.

"There has to be action on the private side after all these public measures."