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Asia follows global rate cuts

  Two Asian central banks followed the world’s largest economies in cutting rates to contain the global financial crisis as a newspaper reported Washington was considering buying into banks to revive shattered confidence.

 

Rate cuts from South Korea and Taiwan helped regional stock markets shake off some of the fear that dominated Wall Street even after Tuesday’s unprecedented coordinated easing from the Federal Reserve and central banks in Europe, Canada and China. But investors remained deeply unsure about how much the joint easing would help. Money markets remained in a state of virtual paralysis and a report in the New York Times suggested that more state intervention would be needed to get banks lending again.

The US Treasury Department is considering taking ownership stakes in many US banks to address concerns that banks have about lending to one another and to other customers, the Times said on its website, citing government officials. The bank recapitalization plan, in its preliminary stages, has emerged as one of the preferred options being discussed in Washington and on Wall Street, the paper said.

The United States would be taking a leaf out of Britain’s book. London said on Wednesday it was prepared to inject £50 billion ($87 billion) of taxpayers’ money into its banks. “After the credit crisis broke last year and accelerated this mid-year, we entered into a liquidity crisis, equity crisis ... right now we are in confidence crisis,” said Markus Ammann, a trader at Bayerische Hypo und Vereinsbank AG in Hong Kong. “If political and financial leaders don’t restore faith very soon and quickly, the impact into the real economy next year will be much worse than many houses still forecast.”

Economies across the world are already slowing. Japan reported a sharp slide in its closely watched machinery orders data, raising expectations that the world’s second-largest economy was probably in recession. Japan’s Nikkei average ended the morning up 1.25%, while Hong Kong’s Hang Seng Index rose 2.5% and China’s benchmark Shanghai Composite Index gained about 0.5%.

Shares in Seoul and Taipei rallied after the central banks each reduced their benchmark interest rates by 25 basis points. The Korea Composite Stock Price Index reversed early losses and gained more than 2.5% after the Bank of Korea surprised analysts by cutting rates. Taiwan’s main TAIEX share index was up more than 1%.

The Fed cut rates by 50 basis points, as did most central banks taking part in Tuesday’s unprecedented move. The Bank of Japan did not take part in the coordinated rate move, as its interest rates are already near zero. However, Finance Minister Shoichi Nakagawa welcomed the move. “In this financial crisis, I highly appreciate that the (central banks) took appropriate steps,” he told reporters. Prime Minister Taro Aso has asked ruling party officials to consider a new economic package to address growing uncertainty surrounding the global financial crisis.

Asian markets’ response to the broad monetary easing contrasts with continuing jitters across the Pacific. The S&P 500 index closed down 1% on Wednesday and has shed 15% this month. Wall Street’s benchmark of fear, the Chicago Board Options Exchange Volatility Index, hit a record high as investors scrambled for cover.

Shares in Europe and Latin America posted deeper losses, extending a rout that has cost investors about $12 trillion over the past year, an amount equal to the entire value of the US mortgage market.

Prices for oil and other commodities fell as fearful investors sought the relative safe haven of cash and gold. “The central banks of the world finally woke up to the gravity of the current situation,” said Charles Diebel, head of interest rates strategy at Nomura. “This is a major step in convincing the world that they are serious about stabilizing.” (Reuters)