Published March 13, 2008
Regional markets get a fillip from Fed's liquidity offer
Plan welcomed but opinions differ over its long-term impact on US economy and markets
By R SIVANITHY
(SINGAPORE) Asian stock markets yesterday rebounded sharply in line with Wall Street's Tuesday reaction to the US Federal Reserve's latest credit market bailout plan, led by a 1.9 per cent jump in Hong Kong's Hang Seng Index to 23,422 and a 1.6 per cent gain for Tokyo's Nikkei at 12,861.
Most markets, however, were off their intra-day highs, suggesting that doubts remain over how effective the plan will prove to be and the length of the stockmarket rally, especially since previous Fed-inspired moves have failed to have a lasting effect.
In yesterday's session, the Straits Times Index first surged 100 points but ended with a net gain of 57.09 points at 2,917.94. It started the week at 2,836, a 15-month low.
The US central bank on Tuesday offered to let the biggest investment banks on Wall Street borrow up to US$200 billion in Treasury securities in exchange for hard-to-sell mortgage- backed securities as collateral.
In effect, the Fed has agreed to hold large volumes of mortgage-backed bonds that Wall Street firms are struggling to sell and is providing them with either cash or Treasury securities that they can immediately convert to cash - all in an effort to ease the acute strain in credit markets brought on by the sub- prime crisis.
The move came in tandem with liquidity injections from the Bank of Canada, Bank of England, European Central Bank and Swiss National bank.
The reaction so far from analysts is that it will lead to some short-term relief but the longer-term problems remain.
'They are essentially creating a US$300 billion bank out of nothing,' the New York Times quoted Lou Crandall, chief economist at financial research firm Wrightson ICAP, as saying.
But while the Fed's moves may relieve short- term cash problems, Mr Crandall said, 'it doesn't solve the fundamental issue - which is the decline of capital in the banking system'.
The US newspaper also quoted analysts warning that the central bank might make things worse in the long run by postponing the repricing of mortgage assets that financial institutions are holding, or by further weakening the value of the dollar and aggravating inflation.
AFP on Tuesday quoted Brian Wesbury, economist at First Trust Portfolios, as saying the action was better than a rate cut because it was targeted at the most troubled financial institutions.
'By narrowly targeting the problems in the credit markets rather than broadly influencing the economy through additional steep rate cuts, the Fed has greatly improved its approach,' Mr Wesbury said.
The news agency also quoted Simon Derrick at Bank of New York Mellon as saying the actions would at least buy the Fed some time and ease pressure to cut rates, which some say could be damaging in the long run by fuelling inflation.
'The jury remains out as to whether this will prove sufficient to free up the liquidity freeze in the credit markets,' Mr Derrick said.
Reuters meanwhile reported that, in an interview, International Monetary Fund (IMF) first deputy managing director John Lipsky said the coordinated move showed that central banks were aware of what's going on and are willing to take innovative actions.
'Is this going to cure what ails the economy? I would guess everyone realises the answer to that is 'no'. Is this going to be helpful in addressing the strains in financial markets? For sure, the answer is 'yes',' Mr Lipsky said.
Independent research outfit Ideaglobal said the impact of the announcement may last for 1-2 weeks but may not have the 2-4 week effect enjoyed after Dec 12, which was when the Fed and other central banks last pumped liquidity into the market.
'The central bank liquidity action can slow the liquidation in mortgage-backed securities and slow the increase in margin calls but the sharp fall in the US housing market/US recession will see a return to the credit bear market in the US,' said Ideaglobal's director of research Mike Gallagher.