Markets: CBs pump cash into currency support

When the Governors of the Malaysian Central Bank and the US Federal Reserve are singing from the same hymn sheet as the IMF, the denials they and many others in similar positions make as to an imminent global financial crisis begin to sound contrived - especially when some central banks are making large interventions to stabilise currencies.

The IMF admitted that there is "a crisis" but declared it "manageable." But since Wednesday, interventions have increased dramatically.

Capital markets had a bad day: New York's Dow Jones fell 0.2 % - helped by extensive profit taking and by previous falls. In London, the FTSE 100 fell by its largest move since early 2003 - it fell 2.3%

Across South East Asia, markets almost all fell, and almost all fell significantly.

Late on Friday, the IMF said in a statement "We continue to believe that the systemic consequences of the reassessment of credit risk that is taking place will be manageable. "The fundamentals supporting strong global growth remain in place."

That's code for "Don't Panic."

At the heart of the problem is the continuing fear that banks active in the US - which includes EU and Japanese banks - are exposed to much higher risk under the sub-prime lending crisis than many have declared, partly due to the fact that the crisis is continuing to develop and is dependent on many factors including the general health of the US economy and the ability of already overstretched borrowers to repay.

The European Central Bank, the US Federal Reserve and the Bank of Japan all pushed huge amounts of money into the markets in a brute force attempt to stabilise the markets.

Just like in 1997, it's not working.

Worse, banks that are exposed to the sub-prime crisis are themselves now being regarded as high-risk borrowers, and the cost of money they can borrow from other banks is increasing as the extent of the crisis becomes more widely known. That leaves them exposed to liquidity risk and central banks are rumoured to be preparing crisis management plans for dealing with banks that run out of money as their own bills increase but the money from defaulters reduces.

BISfaculty presents when America Sneezes in Singapore 10 - 11 September 2007.

See

for details.