Central banks redouble efforts to keep financial system alive

Source YahooFinance

FRANKFURT (AFP) - Central banks redoubled efforts Friday to get the global financial system through the worst financial crisis in decades, raising the volume of injections this week close to around 800 billion dollars.

With stock markets boosted by news that Washington is trying to cobble together a US debt clearance mechanism, the Bank of Japan led the way, making two fresh injections totalling three trillion yen (28.3 billion dollars).

The BoJ has made emergency injections twice daily for the past four days, and the latest brings the total to 11 trillion yen since Tuesday.

The European Central Bank (ECB) meanwhile freed up 40 billion dollars and the Bank of England offered 40 billion dollars (28 billion euros) to financial institutions struggling to obtain funds amid a worldwide squeeze on credit.

The US Treasury said meanwhile it would guarantee US money market funds up to an amount of 50 billion dollars in order to ensure their solvency in another move to shore up the financial sector.

"Money market funds play an important role as a savings and investment vehicle for many Americans," the Treasury said in statement.

"They are also a fundamental source of financing for our capital markets and financial institutions. Maintaining confidence in the money market fund industry is critical to protecting the integrity and stability of the global financial system," the statement said.

It added that the guarantee "should enhance market confidence and alleviate investors' concerns about the ability for money market mutual funds to absorb a loss."

Since the credit crunch began 14 months ago, distrust about the quality of assets being offered as collateral has spread through the money markets where banks obtain short-term funds.

The resulting drying up of liquidity became a drought this week with the demise of Lehman Brothers and the last-minute rescue of fellow Wall Street titan Merrill Lynch and the de-facto nationalisation of insurance giant AIG.

As a result, central banks have had to step up to the plate and fulfill their traditional role as the lender of last resort, making billions available for banks to borrow.

On Thursday the US Federal Reserve made 180 billion dollars of liquidity available to the central banks of the eurozone, Japan, Britain, Canada and Switzerland to help ease the pressures.

The US Securities and Exchange Commission said meanwhile Friday it had followed authorities in Britain, Switzerland and Ireland to ban so-called short selling of shares, widely blamed for the crippling falls in stock prices of banks this week.

Short-selling occurs when investors sell stock they do not yet own in order to profit later from an anticipated fall in prices -- often contributing to the price fall.

The London stock market jumped 6.88 percent, Paris 5.40 percent, Frankfurt 3.87, Tokyo 3.76, Hong Kong 9.6 percent and Shanghai nearly 9.5 percent, and Russian shares roared up 15.5 percent after several trading suspensions.

The dollar surged in London, where the euro fell to 1.4197 dollars from 1.4348 here late Thursday.

And the timeless barometer of confidence, gold, signalled a fall in the fear level, dropping to 855.5 dollars an ounce in Hong Kong from 875.5 dollars Thursday.