Central banks in huge rescue bid

Source TheAge

SIX of the world's central banks have taken unprecedented joint emergency action to prop up global financial markets, as a deepening crisis of confidence threatens to plunge the world into recession.

Facing potentially the worst financial crisis since the 1930s depression, central banks in Europe, North America and Asia last night pumped US$180 billion ($A225 billion) into markets to try to prevent the global financial system from seizing up

The joint action came as more of the world's big financial houses, including the venerable US investment banks Morgan Stanley and Goldman Sachs, became the focus of intense speculation about their solvency.

Fear also gathered momentum in Australia where, despite repeated assurances about the strength of local banks, the dollar slipped below 80 US cents again and the sharemarket plummeted close to a three-year low, further eroding the savings of millions of people.

Shares in Macquarie Bank, the one-time sharemarket darling dubbed the "millionaires factory", crashed another 23% amid speculation that it may be forced into an alliance with a commercial bank.

The world's major central banks were jolted into emergency action late yesterday Australian time when the foreign exchange forward market in Asia effectively ceased functioning - threatening to halt billions of dollars worth of vital international commerce in its tracks.

Said one Australian market observer: "You can't do a trade in the foreign exchange forward market in US dollars, which is the only currency that matters."

Companies - particularly finance companies like banks - raise money on credit markets to pay for their day to day operations. The drought of US dollars would have made it not only more expensive but nearly impossible to raise funds.

The Bank of Canada, the Bank of England, the European Central Bank, the US Federal Reserve, the Bank of Japan, and the Swiss National Bank all contributed to the rescue effort, with the biggest flush of dollars coming from the US central bank.

Within an hour of the unprecedented flood of US dollars into Asian and European markets, the foreign exchange forward market was working again and prices were not too far above normal.

But the central banks' action did not save the Australian sharemarket from suffering another day of heavy losses.

After the market dropped as much as 4.1% during the day, some investors returned later, containing the fall to 2.4% by the close, putting it at its lowest since December 2005.

Macquarie Bank's dive followed a rout among investment banks on Wall Street, triggered by concerns about credit market turmoil and the demise of stalwart firms like Merrill Lynch, which was sold to Bank of America, and Lehman Brothers, which filed for bankruptcy.

Any unwinding of Macquarie - unthinkable just days ago - would not only be a financial nightmare, but would represent a major headache for governments here and around the world.

Through its fast-growing asset management business, Macquarie owns and operates billions of dollars of essential infrastructure including airports, toll roads, communication towers and Britain's biggest water utility.

Nearly every major global bank would have some form of debt or trading exposure to Macquarie while millions of small investors have exposure to Macquarie's listed and unlisted funds.