Central banks served up more cash and assurances to money markets gripped by fear of bank failures as the fate of a plan for $700 billion bailout of the US financial system hangs in the balance.
US President George W. Bush made a dramatic plea to lawmakers to act in order to avoid a looming economic disaster and push through the plan that would cost more than the Iraq war.
US congressional Democrats and Republicans plan to meet later on Thursday to draft a final bipartisan plan, a Democratic source told Reuters.
But uncertainty when and in what shape the scheme will get passed kept financial markets on edge, pushing Asian stocks and the dollar lower and overshadowing news that Midas-touch investor Warren Buffet invested $5 billion in Goldman Sachs.
Australia's central bank pumped extra funds into the local money market again, Bank of Japan dished out nearly $30 billion in its first ever dollar-supply operation and China's central bank let rates in its draining operation drop again, effectively further relaxing its monetary policy.
Hong Kong's monetary authority also added funds to the money market, unsettled by rumors that a local lender, Bank of East Asia, was in difficulty. The bank denied the rumors and its shares rose nearly 4% on Thursday.
The US Treasury cobbled together a plan to buy up to $700 billion of toxic mortgage-related debt from financial institutions after a dramatic week on Wall Street that brought the bankruptcy of Lehman Brothers, the sale of Merrill Lynch and a $85 billion state bailout of insurer AIG.
Crowning the drama, Goldman Sachs and Morgan Stanley, the last two surviving big Wall Street investment banks, traded their coveted status for more Federal Reserve oversight and greater access to its funds, transforming themselves into bank holding companies.
Officials from Sydney to Tokyo painted a grim picture of the global economy, but at the same time worked hard to dispel fears that their banks could be at risk of a similar meltdown that has ravaged the Wall Street.
“The problems in the global financial system are proving to be much more pervasive and costly than was anticipated by many observers a year ago,” the Reserve Bank of Australia said in a semi-annual Financial Stability Review.
But it added: “The Australian financial system has coped better with the recent turmoil than many others. The banking system is soundly capitalized, has only limited exposure to sub-prime related assets, has strong profitability and low levels of problem loans.”
Bank of Japan's policy board member Tadao Noda echoed that sentiment saying that the Wall Street upheaval could hurt the US economy further but that Japan was well equipped to weather the storm.
“The Japanese corporate sector is not saddled with debt, production equipment and employment that need adjustment. That makes the Japanese economy more resilient to downside risks than (in) previous downturns,” he said in a speech to business leaders. Fears that more lenders could be pushed over the edge by the 13-month old credit crisis, made banks hoard cash, jamming up money markets and pushing overnight dollar rates to as high as 10% last week.
Rates have come off since then after the world's major central banks led by the Fed flooded banking systems around the globe with hundreds of billions of dollars in emergency short-term funds.
But markets remained tense and rates for overnight dollar traded at 2.5%-3.5% in Asia, above the Federal Reserve's 2% target, and central banks took no chances and kept the cash and verbal assurances coming.
The Bank of Japan supplied $29.6 billion in one-month dollar funds, just short of the $30 billion offer at an average rate of 3.448%.
Australia's central bank injected 1.210 billion Australian dollars ($1 billion) into the money market, twice the estimated cash deficit.
Hong Kong's central bank added an estimated HK $3.9 billion ($500 million) to the territory's banking system.
In China, the central bank cut a rate on 28-day bond repurchase operations to 3.12%, its second cut in a week, after holding the rate unchanged since the start of the year.
China's bank regulator also denied a newspaper report that it told local banks to stop lending to US financial institutions and assured that foreign banks' operations in China were healthy.
Major Chinese and foreign banks also sought to soothe frayed nerves, saying they kept on trading with each other, even though risk controls were reducing activity.
“We continue to conduct business as usual,” Citibank China, a unit of Citigroup, said in a statement. (Reuters)