World's Banks Try New Tricks In A World Of Shrinking Greenbacks

The Age

Wednesday October 1, 2008

Jacob Saulwick

THE Reserve Bank, and its counterparts across the world, are being called on to try new tricks to alleviate the liquidity shortage.

The Australian central bank said yesterday it would pump another $US20 billion ($A24.3billion) into money markets, responding to a worldwide shortage of US dollars.

Outside the US, markets are suffering from a lack of greenback. While the US Federal Reserve can issue dollars to US-based companies, banks in Australia, but particularly Europe, are scrounging to meet US dollar-funding needs.

A fortnight ago, central banks had agreed to pump about $US290 billion extra into the system to tackle the problem.

But yesterday's intervention by the Reserve, combined with measures by central banks in the US, Canada, England, Japan, Denmark, Europe, Norway, Sweden and Switzerland, takes the total amount of US dollars pumped into global markets to $US620 billion.

The efforts to tackle the squeeze come amid heightened speculation about a coming round of co-ordinated global interest rate cuts.

"After Monday's sharp US market declines ... the case for large synchronised global rate cuts seems strong," Macquarie Group interest rate strategist Rory Robertson said.

"Indeed, the case for large synchronised global rate cuts is stronger than ever before, and little else seems available at present to slow the adverse feedback loop threatening to stall the global economy, or worse."

More economists are now saying Australian interest rates are too high. When the Reserve's board meets on Tuesday, it will be under pressure to cut rates by 0.5 percentage points.

Europe is emerging as a major concern for policymakers.

With doubts growing about their viability, several European banks are finding it difficult to borrow money as other banks worry about being on the wrong end of a failure.

Typically, European banks would be able to access US dollars by swapping euros or other currencies for greenbacks. But the market for currency swaps has broken down as banks worry about counterparty risk.

The money market turbulence has been accentuated by US Congress' rejection of the $US700 billion bail-out package.

In the longer term, economists anticipate a wider role for governments. Macquarie Equities economist Brian Redican said governments were likely to play a bigger role in assisting with failing entities and through tighter regulations, and as providers of public services and transport infrastructure if private operators grow short of capital.

© 2008 The Age

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