UK welcomes world cash injection

A joint plan by five central banks aimed at easing the credit crunch in financial markets has been welcomed by UK Prime Minister Gordon Brown.

Up to $110bn (£54bn) in loans will be made available to world money markets by central banks including the Bank of England and the US Federal Reserve.

There should be more focus on such co-operation, Mr Brown told a UK paper.

Analysts question if the unprecedented move will restore confidence and stave off recession.

Auctions

The Federal Reserve and the Bank of England will team up with the European Central Bank and central banks from Canada and Switzerland to offer the cash loans, to be made available in auctions.

Such a co-operative act is a first, says BBC business editor Robert Peston.

The actions are on a greater scale than the moves taken by the Fed to shore up the economy after the 9/11 attacks on the US, indicating the severity of the current situation and how seriously central banks are taking it, analysts say.

Mr Brown, due in Lisbon for the signing of the new European reform treaty, told the Times newspaper the moves were "the co-operative effort I've wanted to see for some time".

He added: "It signals an international desire to act in what has been a period of global financial turbulence."

Scepticism

Analysts have welcomed the move, but question how far it will go to resolve the crisis in the financial sector, which has its roots in the US sub-prime loan market.

Banks who lent money to high-risk borrowers in the US have been hit hard in recent months as these borrowers, often with poor credit histories, struggled to meet their payments.

Given that much of this debt had been repackaged and re-sold to investors around the world, the impact of the US mortgage defaults has been global.

A string of banks have registered losses because of their exposure to investment products linked to sub-prime mortgages, with total declared losses linked to sub-prime debt about $60bn.

The declared losses and the suspicion of further losses lurking on banks' balance sheets have made banks reluctant to lend to each other.

By acting together to pump extra funds into the system in the form of loans, the central banks hope to ease the crisis of liquidity.

Source:
http://news.bbc.co.uk/2/hi/business/7141632.stm