$180bn Bid To Stem Global Slide

The Age

Friday September 19, 2008

Marc Moncrief and Peter Martin with Eric Johnston, Vanessa O'Shaughnessy

SIX of the world's central banks have taken joint emergency action to prop up global financial markets, as a deepening crisis of confidence threatens to plunge the world into recession.

Facing potentially the worst financial crisis since the 1930s depression, central banks in Europe, North America and Asia last night pumped about $US180 billion ($A225 billion) into markets to try to prevent the global financial system from seizing up.

The joint action came as more of the world's big financial houses, including the venerable US investment banks Morgan Stanley and Goldman Sachs, became the focus of speculation about their viability.

Fear also gathered momentum in Australia where, despite repeated assurances about the strength of the local banks, the sharemarket plunged close to a three-year low, further eroding the wealth and retirement savings of millions of Australians.

Shares in Macquarie Group, the one-time sharemarket darling dubbed the "millionaires factory", crashed another 23% amid speculation that it may be forced into an alliance with a commercial bank.

The world's major central banks were jolted into action late yesterday when the foreign exchange forward market in Asia in effect ceased functioning - threatening to halt billions of dollars worth of international commerce in its tracks.

The Bank of Canada, the Bank of England, the European Central Bank, the US Federal Reserve, the Bank of Japan and the Swiss National Bank joined forces in the rescue effort.

Within an hour of the flood of dollars into Asian and European markets, the foreign exchange forward market was working relatively normally again.

A semblance of calm also returned to global sharemarkets overnight, with major share indices in Europe and New York up more than 1% early today Melbourne time.

But the central banks' action did not save Australia's market from suffering a fourth day of losses yesterday and finishing at its lowest since December 2005.

Macquarie Bank's dive followed a rout among investment banks on Wall Street, triggered by concerns about credit market turmoil and the demise of stalwart firms Merrill Lynch and Lehman Brothers.

Any unwinding of Macquarie - unthinkable just days ago - would have wide repercussions, including the creation of headaches for governments here and overseas.

Macquarie owns and operates billions of dollars of essential infrastructure including airports, toll roads, communication towers and Britain's biggest water utility.

Nearly every major global bank would have some form of debt or trading exposure to Macquarie Group, while millions of small investors are exposed to Macquarie's listed and unlisted investment funds.

Meanwhile, as shares in Australia's main commercial banks continued to be sold off yesterday, the Reserve Bank released data backing the Government's confidence in the sector.

The figures showed the bad loans ratio of Australian banks rose only slightly from 0.31% to 0.36% in the June quarter, well below a decade average of 0.44%.

Prime Minister Kevin Rudd also backed comments by Reserve Bank governor Glenn Stevens, who said Australian banks were "light years" away from the kind of crisis gripping those in America. -- With ERIC JOHNSTON, VANESSA O'SHAUGHNESSY.

AS WORLD ECONOMY SHAKES, RATTLES AND ROLLS, MARC MONCRIEF LOOKS AT WHAT IT MEANS FOR JITTERY AUSTRALIANS CONCERNED ABOUT THEIR FINANCIAL FUTURE.

THE DOLLAR

THE latest round of subprime jitters has not done much to the dollar, which has been hovering around 80 US cents since it fell from near parity with the US dollar last month.

That is a bit surprising, and it may change today. When the US Government demonstrates it is willing to hand over the equivalent of about half of the Australian economy in the space of a month - about $A230 billion between the bail-outs for Fannie Mae, Freddie Mac and AIG and another $A225 billion to the world's financial markets from freezing last night - it ought to hurt that currency. However, investors everywhere battening down and returning to safety. For most, that doesn't include the Australian dollar.

BUSINESS/BANKING

WHEN bankers are doing it tough, there aren't many others who are likely to have it much easier.

Businesses need to do business to grow and bankers need to arrange business to make their money. But these days all but the most aggressive professional investors are closing their purses.

Treasury bills in the US - an investment considered risk-free - have rocketed in price. That means investors in the world's largest economy are nervous and looking to take minimum risk.

Businesses want to know what's coming next. They want to know where the next collapse might come from and they want to know how the US Government is going to react to all the madness. Until those two things become clear, money is likely to stay tight.

THE US GOVERNMENT

RECENT events will have an impact on the US election, but no matter who wins the presidency in November, new regulation is coming for the finance sector.

Business remembers well the days of Sarbanes/Oxley (SOX) - a set of reforms rushed into effect after the terrorist attacks of September 11, 2001.

In the business community, SOX was considered clumsy and heavy-handed. The US will only hurt its economy further if it overshoots the regulatory reforms that both presidential candidates are promising and forces businesses to look for more welcoming economies.

MY GOVERNMENT

AUSTRALIA, as our leaders have been telling us, is in a much better position than our peers in the US and Britain. We have nothing like the US subprime market, unemployment remains low (so far) and our banks have plenty of money to be able to keep working.

As long as those pillars are in place, we are unlikely to see massive shifts in public policy. Deterioration - particularly to unemployment - will give the Opposition a weapon with barbs.

© 2008 The Age

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