Central banks cut rates; govts ready warchest

Bush, global leaders will meet on Friday to evolve a common strategy

LONDON/ NEW YORK: It’s now official. The global financial crisis, which has brought down several US and European financial institutions, is beyond the ability of any one country to control. As if to underscore that, the world’s major central banks – the US Federal Reserve, European Central Bank, Bank of England, Bank of Canada, and Sweden’s Riksbank — lowered interest rates by half a percentage point in an emergency coordinated bid to ease the economic effects of the crisis.

But national governments continued to act to protect their own financial systems, with Britain announcing a massive £500 billion ($875 billion or Rs4,200,000 crore) plan to ward off a banking collapse. The government said it would use £50 billion of the money to buy major stakes in HSBC, Royal Bank of Scotland, Barclays, HBOS, Lloyds TSB, Standard Chartered, Abbey and Nationwide Building Society (if required). Besides, it would make available £200 billion in short-term loans and issue another £250 billion to guarantee loans between banks.

But market fears refused to die down. Despite the rescues and rate cuts, almost all global markets fell, with Japan’s plunging by 9.38% - its largest one-day fall since 1987. Russia’s two main markets had to be shut when stocks plummeted 10%. In India, the Bombay Stock Exchange Sensex closed 367 points lower, after dramatically dropping 954 points at one stage. But soothing words from finance minister P Chidambaram calmed fears.

US president George W Bush discussed the economic meltdown with leaders of Britain, France and Italy during the day, seeking a common strategy ahead of crisis talks between the Group of Seven major economies in Washington on Friday.  

“We live in a globalised world,” Bush said. “We want to make sure that we’re effective.” 

The toll on the world economy is becoming clearer with as much as $2 trillion wiped off the value of US retirement plans in the last 15 months, the head of the Congressional Budget Office, Peter Orszag, said.

The big move during the day was Britain’s, with prime minister Gordon Brown saying “extraordinary times call for... bold and far-reaching solutions.” The recapitalisation plan for big banks, which could see some of them partially nationalised, comes after similar moves by the US, Ireland, Iceland, Belgium and Spain, which have unleashed untested bailout measures to save their largest banks. 

Alistair Darling, chancellor of the exchequer, said the rescue package, the biggest in UK history, will “go a long way” to prevent the banking system from collapse. “We want to make sure we can get the system going again. We are stabilising the system.’’ The government, he said, was trying to reduce the “ fear factor’’ that had led banks to all but stop lending to each other. The package will promote longer periods of lending, and help banks rebuild their capital positions, he said.

Britain’s initiative followed desperate efforts by other governments and institutions. The European Central Bank said it would pump $70 billion into inter-bank money markets in one-day loans on Wednesday, raising the daily amount by $20 billion. The US Federal Reserve said Tuesday it would buy up short-term debt — extending its move into the economy -– and followed that up with the coordinated rate cut of half a percentage point. Japan and Australia pumped billions of dollars into the banking system and Hong Kong slashed interest rates, but there was no stopping the market misery.

The Fed’s decision brought its benchmark rate to 1.5% and its discount rate – the rate it charges on direct loans to banks – to 1.75%. The ECB’s main rate is now 3.75%; Canada’s fell to 2.5%; the UK’s rate dropped to 4.5%; and Sweden’s rate declined to 4.25%. China cut interest rates for the second time in three weeks, reducing the main rate to 6.93%. “The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability,’’ according to a joint statement by the central banks. “Some easing of global monetary conditions is, therefore, warranted.’’

India’s repo rate – the rate at which the Reserve Bank of India (RBI) lends money to banks – stood at 9%. The RBI reduced the cash reserve ratio – money that banks keep with the RBI – by half a percentage point two days ago to release Rs20,000 crore of funds in a tight market.

The Bank of Japan, which didn’t participate in the globally coordinated move, said it supported the action. Switzerland also took part. “These sorts of measures aren’t working anymore,” said Hiroichi Nishi, a broker at Nikko Cordial in Japan. “It’s like you’re trying to pump blood into a heart with clogged arteries.”

The Tokyo stock market suffered what amounted to an indiscriminate sell-off, with investors dumping shares across the board, sending the Nikkei down 9.38% — its biggest one-day plunge in 21 years. “Honestly, this for us is beyond our imagination. We have huge fears going ahead,” Prime Minister Aso told a parliament committee.