Japan and Australia announced new measures to try to ease the global credit crisis on Tuesday after the United States formally announced it was in recession, sparking a massive worldwide stock sell-off.
Tokyo shares plunged 6,35% and Sydney dropped 4,2% following the fourth-biggest point loss in history for the US Dow Jones Industrial Average, which plummeted 7,7% overnight.
Although markets had assumed a recession was already in place, analysts said, the formal confirmation deepened investor gloom in the face of the worst financial crisis since the Great Depression.
In response, Australia’s central bank slashed interest rates by 100 basis points — a larger cut than expected that dropped the official cash rate to 4,25%, its lowest level in more than six years.
“Financial market sentiment remains fragile, as evidence accumulates of weak economic conditions in the major countries and a significant slowing in many emerging countries,” bank governor Glenn Stevens said.
Japan’s central bank, meanwhile, outlined new measures to make it easier for commercial banks to borrow money using corporate debt as collateral, hoping to free up frozen credit channels at the heart of the current crisis.
“Financial conditions in Japan have become less accommodative on the whole, as the financial positions of small firms have deteriorated and an increasing number of large firms have faced a worsening in funding conditions,” it said.
The bank announced similar measures in November 1998 after a number of banks collapsed under mountains of bad debt.
Major banks around the world have collapsed or been taken over during the current crisis, which is rooted in so-called subprime loans in the United States — mortgages and credit extended to underqualified consumers.
Those loans were repackaged and sold to banks and investors around the world. As the economy slowed and housing prices declined, defaults on those loans mounted, sending shock waves through the global financial system.
The defaults have made banks wary — or sometimes incapable — of widespread lending essential to the system’s smooth functioning, and central banks and governments have taken various steps to try to get credit flowing again.
The Wall Street Journal reported that US Treasury Secretary Henry Paulson, who has come under fire for his handling of the crisis, would announce a new programme later on Tuesday to make credit more easily available.
The lending facility, operated by the Federal Reserve, will “increase the availability of auto loans, student loans and credit cards”, the paper said, funded in part by the $700-billion bailout plan approved by Congress.
The plan was initially focused on buying up the bad mortgage-related assets, but Paulson shocked markets last month by switching strategy to focus on capital injections for struggling banks.
World stock markets have been battered during the crisis and slowdown, and Asian markets took another beating on Tuesday.
While Japan and Sydney tumbled Tuesday, Hong Kong was down 4,9% after the morning session. — AFP