Asian stocks soar on joint central bank action | CanadianBusiness.com

BANGKOK (AP) — Asian stock markets soared Thursday after major central banks acted in concert to lower borrowing costs, hoping to prevent a global credit crisis similar to the one that followed the collapse of Lehman Brothers in 2008.

Benchmark oil rose above $100 per barrel and the dollar fell against the euro but rose against the yen.

Japan's Nikkei 225 index jumped 2.4 percent to 8,638.72. South Korea's Kospi surged 4.2 percent to 1,925.17 and Hong Kong's Hang Seng vaulted 5.9 percent to 19,041.36. Benchmarks in Australia, India, Singapore and Taiwan all rose more than 2.5 percent. Mainland Chinese shares on benchmark indexes in Shanghai and Shenzhen rose more than 3 percent.

On Wednesday, the central banks of Europe, the U.S., Britain, Canada, Japan and Switzerland reduced the rates that banks must pay to borrow dollars in order to make loans cheaper so that banks can continue to operate smoothly.

"The moves were cheered by markets as it shows central banks are willing to work together to ease Europe's sovereign debt crisis," Stan Shamu of IG Markets in Melbourne said in a report.

Separately, China's central bank also acted to release money for lending and help shore up slowing growth by lowering bank reserve levels for the first time in three years. The action late Wednesday signaled a key change in monetary policy, analysts said.

"I think the government has the faith now that inflation has peaked, and that now it's time to change the monetary policy from a tight one to a loose one," said Francis Lun, managing director of Lyncean Holdings in Hong Kong.

Chinese banks soared on the news. Hong Kong-listed Industrial & Commercial Bank of China, the world's largest bank by market value, surged 10.4 percent.
By easing reserve requirements, the central bank made available some 350 billion yuan ($55 billion) that otherwise would have been locked up in reserves. Given typical investment trends, much of that money could find its way back into the property sector.

Hong Kong-listed China Resources Land rose 11.6 percent and Poly Real Estate Group added 8.7 percent.

Steel and industrial shares also jumped. Japanese steel producer JFE Holdings shot up 9.6 percent and South Korean steel giant POSCO gained 7.5 percent.
Worries about Europe's financial system — and the reluctance of the European Central Bank to intervene — have caused borrowing rates for European nations to skyrocket. Central banks will now make it cheaper for commercial banks in their countries to borrow dollars, the dominant currency of trade.

But it does little to solve the underlying problem of mountains of government debt. Analysts said that unless there is dramatic action at an upcoming summit of European leaders on the debt crisis, markets are in for further shaky times.

"Until we see some definitely agreed on and, when necessary, legislated initiatives from Europe, optimism can be premature," said Ric Spooner, chief market analyst at CMC Markets in Sydney. "Until we see that sort of thing, there will be a ceiling on the rally."

The central banks' move sent the Dow Jones industrial average soaring 490 points, its biggest gain since March 2009 and the seventh-largest of all time.

The Dow rose 4.2 percent to close at 12,045. The Standard & Poor's 500 closed up 4.3 percent at 1,247. The Nasdaq composite index closed up 4.2 percent at 2,620.

In energy trading, benchmark crude for January delivery was up 39 cents to $100.75 a barrel in electronic trading on the New York Mercantile Exchange. The contract rose 57 cents to settle to $100.36 on Wednesday.

In currencies, the euro rose to $1.3463 from $1.3435 late Wednesday in New York. The dollar rose to 77.67 yen from 77.56 yen.

by Associated Press Dec 1, 2011

Asian stocks soar on joint central bank action | CanadianBusiness.com

Sarkozy Turns to Hu for China Aid as Europe Expands Rescue Fund

Oct. 27 (Bloomberg) -- French President Nicolas Sarkozy said he plans to call Chinese President Hu Jintao today to discuss China contributing to Europe's efforts to resolve the region's debt crisis.

The European Financial Stability Facility will be worth $1.4 trillion after European leaders agreed to leverage existing guarantees by as much as five times, Sarkozy estimated when speaking to reporters at a briefing in Brussels at 4 a.m. local time after the end of a summit of European leaders. Chinese support for the effort would be welcomed, Sarkozy said. The presidents will speak about noon Brussels time, he said.

Chinese Premier Wen Jiabao has signaled willingness to aid the European Union as financial turmoil within the region threatens to crush export demand in China's biggest market. The expansion of the rescue fund and a deal for bondholders to take 50 percent losses on Greek debt may help Sarkozy and German Chancellor Angela Merkel to convince the world that Europe is getting to grips with the crisis.

"China will need time to evaluate this plan very carefully," said Shen Jianguang, a Hong Kong-based economist for Mizuho Securities Asia Ltd. "What worries China is that there is so much disagreement among European policy makers. It doesn't want to be seen spending money on a plan that even Europeans don't want to support."

Sarkozy and Hu's conversation comes a day before a planned visit to Beijing by Klaus Regling, chief executive officer of the EFSF, to court investors. China has the world's largest foreign currency reserves at more than $3.2 trillion.


Sovereign Bonds


The EFSF, established last year to sell bonds to finance loans for distressed euro nations, has since also gained the authority to buy sovereign bonds on the secondary and primary markets, offer credit lines to governments and recapitalize banks as the Greece-triggered debt troubles have spread. The EFSF said Regling's visit to China this week is linked to the fund's original debt-issuance role.

"It is a normal round of discussion with important buyers of EFSF bonds," Christof Roche, spokesman for the Luxembourg- based facility, said by e-mail yesterday. He declined to comment further when contacted by Bloomberg News by telephone. Agence France-Presse reported that Regling will travel on to Tokyo, citing a European Union official in Asia.

China may be willing to respond to a European request to help them fund a package to solve the euro region's debt crisis, AFP said, citing unidentified government officials familiar with the situation.


Chinese Reserves


A press official at the People's Bank of China said he wasn't aware of the issue and asked for faxed questions, which weren't immediately answered. The Ministry of Foreign Affairs and the State Administration of Foreign Exchange, which manages China's foreign-exchange reserves, didn't immediately respond to faxed questions.

Calls to the press office of China Investment Corp., the nation's $300 billion sovereign wealth fund, weren't immediately answered.

Europe is facing international calls to end a debt crisis that President Barack Obama has said "is scaring the world" and U.S. Treasury Secretary Timothy F. Geithner has described as a "catastrophic risk." With a Group of 20 meeting looming on Nov. 3-4, euro-area government heads gathered in Brussels yesterday for the 14th time to tackle troubles that began in Greece two years ago, then engulfed Ireland and Portugal and now threaten Spain and Italy.

Premier Wen said last month that while China was willing to help, that developed nations also needed to put "their own houses in order."


European Responsibility


In Canberra today, Australian Treasurer Wayne Swan echoed that sentiment. "We think it's appropriate that the international community look at what resources the International Monetary Fund has available to it," Swan told reporters. "But in the first instance, any bailout fund in Europe is a responsibility of the Europeans."

Bank of Korea Governor Kim Choong Soo said today the nation hasn't been approached to and hasn't considered joining the effort. Indonesian Vice Finance Minister Mahendra Siregar said the nation hasn't been asked to aid in Europe's effort.

The question of leveraging the AAA rated EFSF has arisen because of the political hurdles in countries such as Germany, the biggest European economy, to increasing the national guarantees that back the fund.


Aid Package


As part of its original role, the EFSF is providing 17.7 billion euros under Ireland's aid package of 67.5 billion euros and 26 billion euros under Portugal's rescue of 78 billion euros. So far, the EFSF has sold two five-year bonds and one 10-year security, all in the first half of this year. The Japanese government bought more than a fifth of the inaugural issue in January.

On Oct. 13, the EFSF announced changes to its bond-sale program for the two countries in the second half of 2011. Instead of selling four "benchmark" bonds in the period, as outlined in mid-May, the fund will sell one security for Ireland valued at 3 billion euros and delay issues planned for Portugal until "early 2012."

The EFSF may have to finance more than 70 billion euros of a planned second aid package for Greece. The initial Greek rescue of 110 billion euros in May 2010 was composed of loans directly from euro-area governments and the IMF.

by Jonathan Stearns and Helene Fouquet Bloomberg News Oct 27, 2011




Read more: http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2011/10/26/bloomberg_articlesLTPGNJ0YHQ0X.DTL#ixzz1bzpDPC4m




Sarkozy Turns to Hu for China Aid as Europe Expands Rescue Fund

Greece to get 100 bil euros in more rescue loans

BRUSSELS, Belgium - European leaders agreed this morning on a crucial plan to reduce Greece's debt and provide it with more rescue loans so that the faltering country can eventually dig out from under its debt burden.

After a marathon summit, EU President Herman Van Rompuy said that the deal will reduce Greece's debt to 120 percent of its GDP in 2020. Under current conditions, it would have grown to 180 percent.

That will require banks to take on 50 percent losses on their Greek bond holdings - a hard-fought deal that negotiators will now have to sell to individual bondholders.

Van Rompuy also said the eurozone and International Monetary Fund - which have both been propping the country up with loans since May 2010 - will give the country an additional $140 billion. That's slightly less than the amount agreed upon in July, presumably because the banks will now pick up more of the slack.

"These are exceptional measures for exceptional times. Europe must never find itself in this situation again," European Commission President Jose Manuel Barroso said after the meetings.

The question of how to reduce Greece's debt load had proved the sticking point in European leaders' efforts to come up with a grand plan to solve its debt crisis.

But it was just one of three prongs necessary to restore confidence in Europe's ability to pay its debts and prevent the 2-year-old crisis from pushing the continent and much of the developed world back into recession.

The first details of such a plan emerged hours earlier, when European Union leaders announced they would force the continent's biggest banks to raise $148 billion by June - partially to ensure they could weather the expected losses on Greek debt.

Van Rompuy also announced that the eurozone would boost the firepower of their bailout fund to about $1.4 trillion to protect larger economies, such as Italy's and Spain's, from the market turmoil that has pushed three countries to need bailouts.

"We have reached an agreement which I believe lets us give a credible and ambitious and overall response to the Greek crisis," French President Nicolas Sarkozy told reporters as the meeting broke this morning. "Because of the complexity of the issues at stake, it took us a full night. But the results will be a source of huge relief worldwide."

Efforts to increase the clout of the bailout fund got a boost earlier in the day when German Chancellor Angela Merkel won a strong endorsement from German lawmakers for her plan to reinforce the fund.

Italian Prime Minister Silvio Berlusconi, meantime, came to Brussels with plans to change his country's pension system and take other steps to balance the budget. Other European leaders had pressed him to accelerate those steps to help build confidence that his nation can manage its large levels of public debt.

Because the plan to shore up the banks applies to European economies both inside and outside the euro area, the initiative was the subject of deliberations by the full EU.

Along with increasing bank capital, the plan calls for a new effort by governments to ensure that banks have the funds they need to operate.

European banks rely heavily on short-term loans, and the vulnerability of that funding played a role in the recent collapse of the French-Belgian Dexia bank.

Concerns about the European economy have caused many investors, including U.S.-based money-market funds, to pull out of European banks. This development has raised banks' operating costs and generated fear that Dexia would be just the first in a series of casualties.

The new plan asks the European Central Bank, the European Investment Bank and other agencies to "urgently explore" a guarantee system so that banks could wean themselves from short-term loans, which often must be renewed weekly or even daily.

Under the plan, banks would have to set aside capital equal to 9 percent of their assets. That represents a significant increase from the 5 percent level used as a standard by the European Banking Authority, when it recently analyzed whether the region's financial firms could weather a new economic downturn.

One concern about increasing relative capital levels is that banks could reach the 9 percent threshold by decreasing their total assets, in other words reducing how much money they loan to businesses, consumers and governments. This pullback could stymie economic growth at a time when it is already slowing in much of Europe.

To head off this prospect, the bank capital plan calls for heightened oversight by regulators to ensure that banks don't achieve the new targets by selling off assets or restricting new loans.

by Associated Press Oct. 27, 2011 12:00 AM


Greece to get 100 bil euros in more rescue loans

Debt crisis plan is not yet ready

BRUSSELS, Belgium - European leaders have agreed to order banks to raise around $140 billion in new capital and ask Greek bondholders to accept losses of as much as 60 percent as work continued on a plan to resolve a lingering financial crisis.

After three days of meetings, however, debate continued Sunday on perhaps the most contentious issue: how to increase the power for a bailout fund whose $600 billion size is widely considered inadequate to convince world markets that it can backstop nations the size of Spain and Italy.

The option favored by many euro-region countries and pushed by the United States is to have the European Central Bank act as the financier of the new European Financial Stability Facility. That would let the ECB loan virtually unlimited sums to the bailout program.

But Germany and the ECB have ruled that out. They fear it would undermine the bank's main mandate of fighting inflation and possibly violate the basic treaties that created the euro.

Other options, including insurance schemes that would allow the bailout fund to support perhaps a trillion dollars or more in bond sales by European governments, are among the alternatives the leaders of the 17 euro nations were debating Sunday night.

They have promised a decision by Wednesday. If the plans to "leverage" the bailout fund are too small, markets will dismiss them as inadequate; if they are too ambitious, they may face opposition from German lawmakers who have demanded that Chancellor Angela Merkel brief them this week before a follow-up summit Wednesday.

by Howard Schneider Washington Post Oct. 24, 2011 12:00 AM




Debt crisis plan is not yet ready

Fed: Crisis alters central-bank focus

WASHINGTON - Federal Reserve Chairman Ben Bernanke said Tuesday that he is more open to using the Fed's interest-rate policies to combat financial bubbles, arguing that in the wake of the economic crisis, central bankers must rethink their assumptions.

Before the economic upheaval, Bernanke acknowledged, central banks viewed financial stability as a "junior partner" to the task of tweaking interest rates to try to boost growth. But both stability and monetary policy are of vital importance to the U.S. economy, he said.

"In the decades prior to the crisis, monetary policy had come to be viewed as the principal function of central banks," Bernanke said at a conference sponsored by the Federal Reserve Bank of Boston, according to a prepared text. "Their role in preserving financial stability was not ignored, but it was downplayed to some extent. The financial crisis has changed all that. Policies to enhance financial stability and monetary policy are now seen as coequal responsibilities of central banks."

During the late-1990s stock-market boom and then the housing-price boom in the early 2000s, the Fed largely avoided using its power to control interest rates and the supply of money as a way to fight off what were in hindsight dangerous bubbles. The argument at the time was that monetary policy is too blunt an instrument to address out-of-whack prices in an individual marketplace. For example, raising interest rates in 2003 to combat rising home prices might have risked dragging the entire economy into recession.

Bernanke was not repudiating that line of thought entirely, arguing in Tuesday's speech that regulation is the best tool to rein in financial excesses. But he appeared open to using monetary policy to keep those excesses in check as well.

"The possibility that monetary policy could be used directly to support financial-stability goals, at least on the margin, should not be ruled out," Bernanke said.

The Fed chief spoke approvingly of a wide range of regulatory tools that central banks around the world are using to ward off financial bubbles that could wreak severe damage on their economies.

In particular, he noted policies aimed at forcing banks to behave more cautiously during good times so that they will be less prone to crisis in bad times. In Korea and Hong Kong, for example, central banks require different loan-to-value ratios on mortgages depending on the economic cycle.

Bernanke did not specifically discuss the outlook for U.S. monetary policy, except to say that the Fed's policy committee "continues to explore ways to further increase transparency about its forecasts and policy plans." At its last meeting, the Federal Open Market Committee considered whether to begin announcing the specific economic indicators, such as the unemployment rate and the inflation level, that might prompt it to back away from its low-interest-rate policies.

But there was no resolution of the issue, and Bernanke's comments merely confirm that it will be an ongoing discussion.

Charles Evans, the president of the Federal Reserve Bank of Chicago, argued in a speech Monday that the Fed should pledge to keep easy-money policies in place until the unemployment rate falls below 7 percent or projected inflation rises above 3 percent.

But others on the Fed policy committee are uncomfortable with anything that could push inflation above the 2 percent or so that the Fed prefers.

by Neil Irwin Washington Post Oct. 18, 2011 06:02 PM



Fed: Crisis alters central-bank focus

European Central Bank offers banks new emergency loans to ease credit crunch as it hold interest rates - Telegraph

Jean-Claude Trichet, fronting his last interest rate meeting as President of the ECB, said the ECB saw 'intensified' threats to the eurozone economy. Photo: Getty

Jean-Claude Trichet, fronting his last interest rate meeting as President of the ECB, said: "The economic outlook remains subject to particularly high uncertainty and intensified downside risks".

His view of the eurozone economy was more gloomy than last month when he merely talked of downside risks, encouraging some investors to believe a rate cut is not far away.

Mr Trichet said the ECB saw "intensified" threats to the eurozone economy and focused on measures to keep the financial system working properly.

To help banks withstand a further worsening of the European sovereign debt crisis and growing tension in the interbank market, the ECB renewed offers to lend banks one-year funding in two operations, this month and in December.

Extra-long 12-month liquidity tenders were first introduced in June 2009 and the first such offer attracted record-breaking use of €442bn.

Mr Trichet also said the bank would buy up to €40bn in covered bonds - bonds backed by assets such as mortgages and public sector loans that are perceived as safe and high-quality assets. The ECB's presence should help free up that credit market and make borrowing easier for banks.

It will also keep offering unlimited amounts of credit at its shorter-term lending operations of up to 3 months through the first half of next year.

Many European banks are exposed to losses on Greek debt. That has made borrowing between banks, which is crucial for their daily functioning, increasingly difficult because of fears the money might not be repaid.

However, Mr Trichet continued to draw the line at other crisis-fighting proposals including the idea of turning the European Financial Stability Facility (EFSF) bailout fund into a bank that can tap the ECB for funds.

"The Governing Council does not consider it would be appropriate that the central bank would leverage the EFSF," he said.

The ECB has raised rates twice this year and may have been swayed from going into reverse immediately by inflation hitting 3pc last month, well above its target of close to but below 2pc.

"Inflation has remained elevated ... and is likely to stay above 2pc in the months ahead but to decline thereafter," Mr Trichet said.

Holger Schmieding, economist at Berenberg Bank, said: "The ECB is now likely to prepare an interest rate cut within the next four months, by March at the latest."

by The Telegraph Oct 6, 2011



European Central Bank offers banks new emergency loans to ease credit crunch as it hold interest rates - Telegraph

Central Banks Take Measures to Prepare for Liquidity Shortages « HousingWire

Central banks are addressing their role as Lender of Last Resort (LOLR) by expanding liquid assets and lending much more generously since the economic crisis hit in August 2007, and according to the Federal Reserve Bank of New York, that's exactly what they should be doing.

Two economists at Bank for International Settlements , Stephen Cecchetti and Piti Disyatat, outlined in their research paper "Central Banking Tools and Liquidity Shortages" the traditional tools that central banks use to mitigate financial instability nationally or regionally.

According to Cecchetti and Disyatat, there are three different types of liquidity shortages: shortage central bank liquidity, acute shortage funding liquidity at specific institutions and systematic shortage funding and market liquidity.

Different types of liquidity shortages can happen simultaneously. Cecchetti and Disyatat said the central banks of the world can reset the balance in liquidity by lending to the open market, buying from the open market or targeting financial transactions towards specific institutions instead of the market as a whole.

A shortage of central bank liquidity occurs when institutions find themselves short on reserve balances. This is usually caused by a spike in overnight interest rates, a computer glitch or an inadequate supply of reserves to the system as a whole. It is the least threatening shortage of the three and the central bank acquires virtually no risk in lending to the open market.

The second kind of liquidity shortage occurs when a particular institution experiences an acute shortage of funding liquidity associated with solvency concerns as the willingness of counterparties to trade with the institution dissipates. This situation can arise as the result of a flawed business strategy that has left the institution exposed to persistent cash drains. Any liquidity support extended in this situation will likely expose the central bank to credit risk, since an institution in need of a loan of last resort will typically have exhausted its stock of both marketable assets and acceptable collateral.

A systematic shortage of funding and market liquidity is potentially the most destructive of the three. It involves tensions emanating from an evaporation of confidence and from coordination failures among market participants that lead to a breakdown of key financial markets. This kind of shortage can produce a "run" on the bank when consumers lose confidence.

Since the origination of the financial crisis, central banks are following standard LOLR procedures for all three shortages. With regard to central liquidity shortages, Cecchetti and Disyatat said banks are accommodating the greater instability in the demand for reserves and alleviating distributional problems by varying the size and frequency of operations. That broadens the number and type of counterparts and enlarges the scope of eligible collateral to lend to financial institutions.

For acute shortages of funding liquidity at specific institutions, central banks have extended emergency lending assistance to various financial institutions. Take for example the Federal Reserve’s support for Bear Stearns, AIG, and Citigroup.

Cecchetti and Disyatat named four crucial actions the central banks are taking to stabilize the systematic shortage of funding and market liquidity.

Central banks seek to ensure the availability of backstop liquidity to key financial institutions. For example, central banks created of the Federal Reserve’s PDCF, which established overnight funding for primary dealers.
Central banks are providing greater assurance of the availability of term funding through the lengthening of the maturity on refinancing operations as well as the establishment of inter-central-bank swap lines to ensure the availability of (primarily) dollar funding in offshore markets.
Policymakers have worked to provide high-quality securities — usually sovereign ones — in exchange for lower quality, less liquid securities in order to encourage trading in the latter.
The banks have also established initiatives aimed at ensuring the availability of credit to non-banks in cases where particular financial markets had become inoperative.
These policy implementations were applied in two phases the first of which being August 2007 through September 2008. During that time centrals banks varied the asset composition of their balance sheets, but kept the overall size of assets largely the same. As the crisis intensified following the collapse of Lehman Brothers, central bank operations entered a second phase where they expanded their balance sheets and increased the size as well as scope of their efforts in market functionality. This shift is visible in the chart below.

Cecchetti and Disyatat concluded the central banks' ability to mitigate the current economy must be flexible to follow and provide exactly what the market needs to avoid disastrous liquidity shortage.

"The current crisis has made it abundantly clear that the argument that only open market operations are needed to meet the liquidity needs of fundamentally sound banks is flawed since money markets themselves can fail to function properly," said the report. "This is even more so in light of recent developments in the financial system that have increased the interdependencies between financial institutions and markets, and made it more imperative that central banks be prepared for situations in which both experience problems simultaneously."

by Christine Ricciardi Housing Wire August 13, 2010

Central Banks Take Measures to Prepare for Liquidity Shortages « HousingWire