Global Central Banks Work To Soothe Fears

Central Banks Take Action to Bolster Liquidity

Global central banks, including the Federal Reserve, the Bank of Canada, the Bank of England (BOE), the Bank of Japan, the European Central Bank (ECB), and the Swiss National Bank (SNB) announced coordinated measures this morning designed to address the continued elevated pressures in U.S. dollar short-term funding markets. Specifically, the Fed doubled its swap line to the ECB to $110B and increased its line to the SNB to $27B. In addition, new swap lines have been authorized with the Bank of Japan, the Bank of England, and the Bank of Canada. All of theses reciprocal agreements have been authorized through January 20, 2009.

In addition to the Fed's actions, the ECB added an overnight maturity to its repo operations, noting that it will keep the facility in place “for as long as needed.” The ECB also announced that it would increase the amount it would lend out for 28 days to $25 billion and for 84 days to $15 billion. The SNB also increased the size of its 28- and 84-day auctions, raising them from $6 billion each to $8 billion and $9 billion, respectively. The SNB initiated an overnight auction facility as well. The BOE offered up $40 billion in overnight loans, of which $14 billion was borrowed.

This morning's moves were designed to bolster liquidity in the interbank market, which has seized up in recent days. Banks around the world are less willing to lend to one another, causing LIBOR to skyrocket and sending T-bill rates to their lowest levels since World War II. The TED spread, which is the difference in those two, has spiked to its highest level since 1984.

Will This Work?

The Fed and other central banks around the globe have opened various swap lines since the financial crisis kicked off in August of 2007. While the credit lines have not reversed the financial crisis they have probably prevented it from being worse. The basic problem is that banks around the world are less willing to loan dollars to one another because they can not accurately assess what the risk is on the other side of that trade. Opacity is the hallmark of this financial crisis. Figuring out who owns what and what the risks are to those underlying assets has caused a knowledge gap to open up which has allowed rumors to run rampant and set off enormous volatility throughout the markets.

Policy actions have not been limited to repurchase agreements. Since the onset of the crisis, the federal funds rate has been slashed by a total of 3.25 percentage points to its current 2.00 percent. There is a debate raging around the world as to whether or not even lower interest rates will be needed to solve the crisis. The argument on one side is that if banks are unwilling to loan money to one another, and instead are buy buying T-bills at near zero percent, then the level of interest rates does not matter that much. On the other side, however, a lower federal funds rate would help slow the rate at which credit quality is deteriorating and also make it less costly for financial institutions to deal with their credit issues. This, in turn, might make banks around the world more willing to lend to one another. For now, the Fed has sided with the former argument, leaving interest rates unchanged at Tuesday's FOMC meeting.

Wachovia Corporation
http://www.wachovia.com

Disclaimer: The information and opinions herein are for general information use only. Wachovia Corporation and its affiliates, including Wachovia Bank, N.A., do not guarantee their accuracy or completeness, nor does Wachovia Corporation or any of its affiliates, including Wachovia Bank, N.A., assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or any foreign exchange transaction, or as personalized investment advice. Securities and foreign exchange transactions are not FDIC-insured, are not bank-guaranteed, and may lose value.