Australia's central bank adds A$900 mil.
By Tony Munroe and Ian Chua, Reuters Thursday, September 13, 2007, 12:00 am TWN
HONG KONG -- Australia's central bank struggled to temper a rise in short term interest rates on Wednesday, while U.S. Treasury Secretary Henry Paulson said he saw no quick end to the crisis of confidence in credit markets.
The Reserve Bank of Australia added A$900 million (US$750 million) to the banking system to calm a spike in money market rates caused by the global credit squeeze, which has led the country's banks nearly to halt lending while borrowers scrounge for sources of funding of a month or longer.
Investor flight from risk took a breather on Wednesday after European and U.S. stock markets rallied the day before but fresh uncertainty hit Japan after Prime Minister Shinzo Abe resigned, sending the Nikkei share average down 0.3 percent and lifting Japanese government bonds.
Asian stocks outside Japan were up 0.3 percent by 0515 GMT.
Yield spreads between emerging market debt and U.S. Treasury notes — a key gauge of risk aversion — narrowed 7 basis points on Wednesday, building on Tuesday's 7 point contraction.
Tightness in money markets has convinced many watchers that the Federal Reserve will cut interest rates at its Sept. 18 meeting. Fed funds rate futures are pricing in a roughly 70 percent chance of a 50-basis-point cut, while the probability of a quarter-point reduction is already fully factored in.
"The growing economic risk, coupled with the de facto tightening in financing conditions, argue for a substantial cut in the federal funds rate target," Goldman Sachs economists wrote in a client note.
Paulson said the uncertainty in financial markets would last longer than the turmoil that followed the Asian financial crisis and the Russian default of the 1990s or the Latin American debt crisis of the 1980s, the Financial Times reported. He said the complexity and global distribution of securities at the heart of the current problem could prolong the crisis.
"We expect this period of turbulence to go on for a while," the newspaper quoted him as saying in Washington.
Meanwhile, while European Central Bank policy makers said that market turmoil had clouded the outlook for monetary policy, Executive Board member Juergen Stark insisted that rate tightening had not been abandoned.
Separately, the head of the European Central Bank said on Tuesday that the region's banks were sound despite the confidence blow dealt by the U.S. subprime crisis.
In a positive sign for the credit markets, four lenders on Tuesday sold a $1 billion block of a previously unsold $3.5 billion bank loan for General Motors' sale of Allison Transmission to the Carlyle Group and Onex Corp. in the biggest sale of a buyout loan since late July, according to ING.
Rating agency Moody's said access to credit for Japanese firms had been unaffected by tighter global conditions.
"Most companies enjoy solid credit profiles, and while the stronger yen — resulting from recent market gyrations — may pressure revenue and earnings for exporters, their overall operations and credit fundamentals remain strong," said Emiko Otsuki, Moody's chief credit officer for Japan.
The Reserve Bank of Australia's A$900 million cash injection to the banking system on Wednesday was above the market's estimated cash need of A$816 million. The addition should see commercial banks' accounts with the RBA expand from the current A$4.31 billion, well above the A$750 to A$850 million range seen before the global credit squeeze started to bite.
The central bank has been providing the banking system with extra cash for the past month in an attempt to break a logjam in lending and limit upward pressure on some key market rates.
The RBA even widened the types of assets it accepts as collateral when lending to financial institutions, yet it has had little success in restraining interbank rates.
The 3-month Aussie bank bill yield edged up to 7.12 percent, extending a climb from 6.98 percent on Friday.
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