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Subprime woes: How much cash have Central Banks injected?

Published on Fri, Aug 10, 2007 at 13:15 | Source : Moneycontrol.com

Updated at Sat, Aug 11, 2007 at 13:17

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To counter the subprime woes, the world's biggest monetary authorities are infusing billions of dollars to meet the sudden demand for cash from banks hit by the subprime impact.

Each market is interpreting its own Central Bank differently.

It all began in Europe with the European Central Bank's action of infusing almost 130 billion dollars or 94 billion euros. It came as a surprise and stunned the markets at that time. As soon as the BNP Paribas news came out and the inter-bank rates went up to 4.75%, compared to the ECB rate of 4%; that jump brought a proactive statement from the ECB that it is watching and that it will supply liquidity.

And liquidity indeed came. The European Central Bank injected nearly 95 billion euros into money markets to tackle the situation. It said it would provide unlimited cash. The last time the ECB came ahead with such large-scale liquidity was after 9/11 - that was just a 69 billion Euro injection.

The Fed's stance was more muted. It injected USD 24 billion in banking reserves, double of what it normally injects in its normal money market operations. And more importantly, it started the repo action a bit earlier than its normal scheduled time. Beyond that, one hasn't heard any statement from the Fed.

The interpretation of the market is that perhaps the ECB's right in soothing nerves and saying that it will stand by and ensure that the liquidity crisis doesn't snowball. But the jury is still out, whether Central Bankers should not be bailing out their systems; should they only come in and talk-up markets, and not go into anything proactive, or that are they getting into a moral hazard and really creating more troubles for the markets men - because market men will normally say that the Central Bank is reacting with 130 million-odd dollars; then does the Central Bank know something that we don't?

Is the crisis bigger than what we think it is?

On the Asian side, the Bank of Japan added USD 8.5 billion while the Reserve Bank of Australia loaned USD 4.2 billion. The Singapore central bank has injected 1.5 billion dollars.

There is a feeling that they have to protect their own currencies and prevent any run on their currencies and ensure liquidity at this point of time.

But it disturbs; the Asian Central Banks' thinking as of now - most of the banks are in a tightening mode, whether it's Korea, Japan or India. They are raising rates to rein in inflation. Now with the liquidity injection, there is a kind of mixed signals coming to the market.

The markets will be unable to fathom whether this will mean a permanent change in the stance of the Central Banks. But at this point in time, none of the Central Banks have spoken, indicating that they themselves are confused; they themselves are uncertain.

We will have to wait and see how the Central Banks react. But this could be the time that they would be coming out and defending their currencies.

How much cash have the Central Banks injected?

- ECB injects 94 bn euros Vs 69 bn after 9/11

- Fed injects $24 bn

- BoJ injects 1 trillion yen

- Australia central bank injects $4.95 bn; double normal ops

- Singapore central bank injects $1.5 bn

Luis Costa of ING Bank says, "We are still trying to absorb the information from yesterday; we believe that it is going to be very likely to see another injection of liquidity from the European Central Bank - there is the level of mistrust. The level of opacity when it comes to new problem zone on the buy side of the business in the banking sector, is just too high. I believe that we are going to need the ECB to step in once again today and basically provide liquidity for most of the players out there."

Will banks accept the ECB's offer?

It would be surprising if any of the banks declined the offer from the European Central Bank at this point. Yesterday for example, overnight lending rates were trading somewhere in the 4.5% level. The Bank stepped in and said we will lend this much money to anybody who wants it, at 4%. So, it would be very difficult for me to turn that down for a European banker. They would take as much as they can and put it to work into the system because it would basically pick up 53 basis points.

We may get a similar condition today. The Bank is going to lend money for a three-day period, rather than an overnight period. The banks were calling for a little bit longer-term liquidity support. So, this actually dovetails nicely with those requests.

And again, if three-day lending rates were trading at a premium to the banks' 4% target, then the banks would take all of it. So, we may get even more liquidity into the system than we had yesterday, yesterday's USD 130 billion, into the European system was the largest intervention we have seen since September 11.

So, it really does illustrate not so much the crises, but the concern that investors have at this point with respect to both the banking and financial system and indeed the broader economy, because if the US subprime mortgage market does need a significant slowdown in the US economy, that by nature is going to cause a suffering in European share prices across the board and also to the European assets.

Of course, we are seeing that spillover into things like oil and gold where investors are selling those assets in order to meet margin calls on declining asset prices in the stock market, bond market and in the credit market. So, this is the domino effect that a lot of investors and analysts have been pointing to for a number of weeks now. It just seems to have accelerated very quickly.