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Central Banks move to tackle credit crisis

LONDON: The Central Banks of the richest economies of the world have launched a co-ordinated move to tackle the crisis of the “unrestricted credit”, which has caused a turmoil in the global money markets.

The U.S. Federal Reserve — guardian of the $12-trillion economy — has stated that it would create a “new term auction” facility under which it would lend $40 billion in four auctions starting this week. The Federal Reserve’s lending rate would be far below what it charges on direct loans to commercial banks — now referred to as “discount window loans”. The European Central Bank, the Bank of England and the Swiss Central bank have also announced similar measures.

However, observers say that if the Central Bankers hoped the clouds over the credit horizon would clear, the reality is that the storm is gathering strength. The broad strategy of the Central Banks is to ease the current credit crisis and to contain, and perhaps ward off, the looming prospects of an economic recession.

There are many imponderables and hence it remains to be seen if the strategy of keeping the markets calm to ward off a recession will yield dividends. However, the co-ordinated action by the Central Banks has attracted praise from financial experts and the media. As one observer put it: “There is no silver bullet to the credit market woes but the joint and co-ordinated strategy should help to provide the much-needed liquidity and restore confidence in inter-bank markets”.

The Euro zone’s 21 largest banks currently hold $244 billion as “off-balance sheet” assets but that may now be brought back to their balance sheets. This may trigger a credit squeeze in the wider economy, the European Central Bank has warned. This is unlikely to prove a solution to what still looks like a “prolonged and seismic” shift in financial conditions.

One observer concludes: “The policy-markers are navigating in unchartered and dangerous waters. The action of the Central Bankers will bring little more than calm but they are likely to need strong nerves for the turbulence that probably still lies ahead.”

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