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Central banks dish out more funds as markets reel

MNB

Japan and Australia pumped further $17 billion into money markets on Thursday to prevent banks from hoarding cash amid a global crisis of confidence sparked by this week’s dramatic Wall Street shake-up.

Global stock markets plunged after US government’s $85 billion rescue of insurance giant American International Group failed to calm investors, now wondering which company will be the next victim of the 13-month old credit crisis. Overnight, news emerged of takeovers involving No. 2 US investment bank Morgan Stanley, top US savings and loan Washington Mutual and major UK mortgage lender HBOS, reflecting the seismic change in the global financial landscape.

“Banks are still reluctant to lend money to each other, everybody seems to sit on stockpiles of cash,” said Markus Ammann, a trader at Bayerische Hypo und Vereinsbank in Hong Kong. The squeeze eased a notch in early Asian business on Thursday, but US dollars still were in short supply and overnight funds traded at 6-8.5%, still well above their usual level close to the Federal Reserve’s 2% target. Lending between banks nearly seized up this week after Lehman Brothers filed for bankruptcy, Merrill Lynch got taken over by Bank of America and AIG needed a massive bailout to survive, driving up costs of short term funds.

Central banks around the world have responded to the squeeze, exacerbated by investors’ flight into safe havens of gold and government bonds, by flooding markets with cash, but with only limited success. The Bank of Japan, pumped ¥1.5 trillion ($14.35 billion) on Thursday, topping up the ¥5.5 trillion injection in the past two days, as overnight rates crawled back above the central bank’s 0.5% policy target.

In Australia, the central bank added a total A$3.015 billion ($2.40 billion) in cash to the market in its daily operation, bringing its injection this week to A$11.2 billion response to signs of persistent tightness. A key measure of funding pressure in Australia is the spread between three-month bank bill rates and three-month overnight index swap (OIS) rates. That had surged to a near-record of 80 basis points, up from around 33 basis points at the start of the month. (Reuters)

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