/ 29 September 2008

Banks supply cash to keep money markets alive

The central banks of Japan and Australia hosed more cash at their banks to persuade them to resume lending to each other after a weekend of bank failures in Europe and urgent talks in the United States to seal a $700-billion bailout plan.

The Bank of Japan added ¥1,5-trillion ($14,2-billion) to its banking system, the ninth consecutive day of cash pumping into the money market, before adding another ¥400-billion on a spot basis, while the Reserve Bank of Australia added A$2,7-billion ($2,2-billion) to keep lending among banks going.

As US lawmakers geared up for a vote on a $700-billion fund to buy bad debt to alleviate the financial crisis, the cost of short-term US dollar funding in Asia on Monday drifted lower.

But if investors needed a reminder that the year-old global credit crisis was far from over, emergency bank nationalisations in Europe over the weekend provided one.

Financial group Fortis was forced to accept a €11,2-billion ($16,4-billion) injection by the governments of Belgium, The Netherlands and Luxembourg after talks with European Central Bank President Jean-Claude Trichet to prevent financial contagion engulfing one of Europe’s top 20 banks.

In Britain, the government will nationalise troubled mortgage lender Bradford & Bingley and is discussing the sale of its £24-billion ($44,3-billion) deposit book and 200 branches, people familiar with the matter said.

And in Germany mortgage lender Hypo Real Estate struck a last-minute deal with a group of banks for credit to resolve a refinancing squeeze.

The rate on overnight dollar funds in Asia fell as low as 1,5% and was as high as 3%, dealers said. That compared with a range of 2,5% to 3,5% on Friday and 10% earlier this month when Lehman Brothers collapsed under the weight of too many risky assets on its books.

”Congress votes and once that is done, probably a slight easing on rates. But the fact that much of continental Europe and the UK still face spill-over effects from the US indicates dollar demand for funding will still remain rather high,” said Suresh Ramanathan, a strategist at CIMB.

In Japan, upward pressure on overall rates remained given that foreign players, already hit by heightened counterparty worries, faced even more difficulty tapping cash as Japanese market participants refrained from lending actively before the September 30 end of the fiscal half-year.

Once a byword for safety and liquidity, the short-term lending market in which banks lend to each other has repeatedly seized up in the financial crisis because of increasing worries over the creditworthiness of borrowers.

Bank of Japan Deputy Governor Kiyohiko Nishimura said on Monday the central bank should be attentive to downside risks to the nation’s economic growth but added that the possibility of a deep adjustment to the economy was small and that the country’s financial markets were functioning well.

The South Korean won fell more than 3% to near five-year lows against the dollar and was headed for its worst month in a decade because traders rushed to secure dollars amid persistent global turbulence.

The currency, which has lost 8,5% this month alone, also took a toll on the stock and bond markets as investors fled for assets that looked safer, such as cash.

The Finance Ministry’s warnings of possible dollar-selling intervention failed to stop the won from falling as much as 3,1% to 1 198,1 per dollar, its weakest since December 30 2003, as they were not accompanied by action. – Reuters