Thursday, 09 October, 2008
The United States Federal Reserve, European Central Bank and four other central banks have lowered interest rates in an unprecedented coordinated effort to ease the economic effects of the worst financial crisis since the Great Depression.
The Fed, ECB, Bank of England, Bank of Canada and Sweden's Riksbank each cut their benchmark rates by half a percentage point. The Bank of Japan, which did not participate in the move, said it supported the action. Switzerland also took part. China's central bank lowered its key one-year lending rate by 0.27 percentage point.
Agency reports said the Fed reduced its benchmark rate to 1.5 per cent. The ECB's main rate is now 3.75 per cent; Canada's fell to 2.5 per cent; the UK's rate dropped to 4.5 per cent; and Sweden's rate declined to 4.25 per cent.
China cut interest rates for the second time in three weeks, reducing the main rate to 6.93 per cent.
Also in the United Kingdom (UK), the government has unveiled a bail-out plan for banks involving £50 billion.
Chancellor of the Exchequer Alistair Darling is expected to raise as much as £50 billion ($87.6 billion) by March 2009 to fund a bank rescue plan announced yesterday.
Under the bail-out plan, the government will sell new debt to buy £25 billion of preference shares from Royal Bank of Scotland Group Plc, Barclays Plc and at least four other banks this fiscal year, which ends March 31, 2009. A further £25 billion will be available to other banks if they need an infusion of capital.
The plan also guarantees about £250 billion of tenant loans for banks and doubles the amount the Bank of England makes available for banks to borrow against impaired assets to at least £200 billion.
The government statistics bureau will now decide whether to classify the investment as current or capital spending, the Treasury spokesman said. It means borrowing may rise by a similar amount unless the extra spending is netted off against the assets purchased.
Other elements of the rescue package will stay off the government books for now. The loan guarantee will be classified as a contingent liability, and the expanded Bank of England lending facility will be funded through Treasury Bills, the government said.
France and Germany have also expressed their intensions to unveil similar bank rescue plans. Taxpayers may benefit from the insurance premiums, based on credit default swap rates, charged on the loan guarantee. They may gain or lose on the value of the equity stakes taken in the banks. One of the goals of the coordinated rate cuts is to spur nervous consumers and businesses to spend more freely again. They clamped down as housing, credit and financial problems intensified last month, throwing Wall Street into chaos. Many believe the United States is on the brink of, or already in, its first recession since 2001, and one that could quickly spread to other countries around the globe.
"The recent intensification of the financial crisis has augmented the downside risks to growth," the Fed said in explaining the coordinated action, the latest in a series of bold moves meant to pry open tight lending and revive the global economy.
The Dow Jones industrials, already down 875 points this week, fell another 150 yesterday, and all the major indexes were down sharply.
The Fed's action will reduce borrowing costs almost immediately for U.S. bank customers whose home equity and other floating-rate loans are tied to the prime interest rate. Bank of America, Wells Fargo and other banks cut their prime rate by half a point to 4.5 per cent after the Fed announcement. White House spokesman Tony Fratto welcomed the cooperation among the Fed and other countries' central banks to battle the crisis. "It's important and helpful that central banks are working in a coordinated way to deal with stress in the financial system," Fratto said.
The country's presidential contenders also embraced the action. "This is a global crisis that requires a global solution," said Democrat Barack Obama. Republican rival John McCain hoped it would contain the "financial crisis spreading across the globe."
Some analysts were skeptical that the coordinated rate reductions would do much to turn things around. Meanwhile, the apex regulator of the Nigerian capital market, the Securities and Exchange Commission (SEC), yesterday reassured investors that the fundamentals of the stock market remained strong and therefore should not panic.
The Head, Media of SEC, Mr. Lanre Oloyi, who spoke to THISDAY on telephone while reacting to the bail-out package by the Nigerian Stock Exchange (NSE) and some banks, said investors should not panic and sell their shares due to the persistent fall in the prices of shares.
“I want to assure investors that they should not panic and sell their shares. The fundamentals of the market are very strong and the market will rebound very soon given the efforts SEC and over stakeholders are making,” he said.
Speaking on the N600 billion packages by the six banks, Oloyi said that SEC was not involved in the arrangement.
“Following the measures announced by the Federal Government on August 26, 2008, which included the appointment of Market Makers and Share Buy-Back, SEC with the approval of the Minister of Finance on September 15, issued guidelines on market making and share buy-back. Operators should adhere to those guidelines. The Commission will not hesitate to apply the necessary sanctions on any operator that fail to comply with the rules guiding operations in the market,” he said.
Oloyi added that SEC had not placed a restriction on new shares, explaining that companies willing to raise fresh capital are free to do so once they complied with the requirements.
The Council of the NSE on Tuesday approved six banks that are ready to inject N600 billion into the stock market in an effort to stabilize the falling prices. The banks would play as market makers and each will devote N100 billion to the exercise.
The banks include United Bank for Africa Plc, Zenith Bank Plc, First Bank of Nigeria Plc, Intercontinental Bank Plc, Union Bank of Nigeria Plc and GTBank Plc.
Source: http://www.thisdayonline.com/
