By THE CANADIAN PRESS
http://cnews.canoe.ca/CNEWS/Canada/2008 ... 76-cp.html OTTAWA - Confronting the deepest money market crisis since the Great Depression, central bankers around the world pledged as much as a quarter of a trillion dollars Thursday to support confidence in the global financial system.
The central banks' move to ease the global financial crisis that has dried up credit for millions of consumers and businesses around the world helped stock prices recover in Canada and the United States.
The Toronto market gained nearly 200 points and Wall Street closed about 400 points higher, reversing big losses the previous day.
Investors were also reassured by a report that the U.S. government might create an entity to absorb banks' bad debt, which has been at the heart of the turmoil on Wall Street that has threatened to tip the U.S. economy deeper into recession.
In a statement issued at 3 a.m. ET and matched by other central banks, the Bank of Canada said it was acting with the U.S. Federal Reserve, the Bank of England, the European Central Bank, the Bank of Japan and the Swiss National Bank in "co-ordinated measures designed to address the continued elevated pressures in U.S.-dollar short-term funding markets."
In particular, the Bank of Canada and the Federal Reserve set up a US$10-billion reciprocal currency arrangement to provide U.S.-dollar liquidity in Canada. This could be drawn on by the Bank of Canada to support any Canadian financial institutions that ran short of ready cash.
"The bank judges that it is not necessary for it to draw on this swap facility at this time, but that it is prudent to have the agreement in place," the statement said.
"The Bank of Canada continues to closely monitor global market developments and remains committed to providing liquidity as required to support the stability of the Canadian financial system and the functioning of financial markets."
The central banks "continue to work together closely and will take appropriate steps to address the ongoing pressures," it added, echoing the statements from the other central banks.
Credit market pressures have intensified since the weekend collapse of Lehman Brothers Holdings Inc. and Tuesday's effective U.S. nationalization of American International Group, and central banks had already injected billions of dollars this week in an effort to keep banks from hoarding cash.
While investors reacted warmly to the central bank cash injections into global finance, the report of a broader U.S. government vehicle to sweep up bad debt was even more reassuring to the markets.
Late Thursday, U.S. Treasury Secretary Henry Paulson said the government was crafting a plan to rescue banks from bad debts that are at the heart of Wall Street's worst financial crisis in decades after meeting with congressional leaders to brief them on the options they are considering.
Paulson, Federal Reserve chairman Ben Bernanke and Securities and Exchange Commission chairman Christopher Cox asked lawmakers to pass legislation giving the government power to buy distressed assets.
Still, volatility persists over fear in the markets about the future of such major U.S. financial players as thrift bank Washington Mutual Inc. and investment bank Morgan Stanley.
"We're seeing a tremendous amount of nervousness. That nervousness is leading to volatility," said Anthony Conroy, head trader for BNY ConvergEx Group. He said the markets hadn't seen as much fractiousness since the 1920s.
In its statement on market infusions, the Fed said it has authorized swap lines similar to the Canadian arrangement totalling US$247 billion: $110 billion with the ECB, $60 billion with the Bank of Japan, $40 billion with the Bank of England and US$27 million with the Swiss National Bank.
This represents a $180-billion expansion of the swap facilities the Fed previously had in place with the other central banks.
At home, the Fed injected another $55 billion into the U.S. domestic system Thursday to ease overnight lending rates.
"Banks have a target for overnight funds and they are obligated to inject more liquidity into those markets if overnight rates rise above their targets," explained Avery Shenfeld, senior economist at CIBC World Markets.
"If each bank holds on to excess reserves rather than lending them to other banks, then the effective overnight rates will rise even if the central banks have not moved their target."
The Bank of Canada's involvement followed a statement by Finance Minister Jim Flaherty emphasizing "that Canada's banking and insurance industries are well capitalized and our financial system is sound."
The move by the Fed and its overseas counterparts was aimed at boosting waning confidence and getting banks around the world to open their ever-tightening purse strings. Banks have been increasingly reluctant to lend to each other as distrust spread throughout the financial system.
A sharp rise in borrowing costs has worsened as bad bets on dodgy mortgage-backed securities claimed more Wall Street giants. The total amount of commercial paper fell by $52.1 billion for the week that ended Wednesday, as banks cut back the short-term loans companies from small garment factories to General Electric Co. depend on for their daily operations. At the same time, the interest rate on those short-term loans more than doubled, with rates for seven-day paper jumping to 4.5 per cent from 2.5 per cent.
Troubles have not been confined to North America and Western Europe.
Russia closed its stock exchanges for a second day Thursday as President Dmitry Medvedev pledged a 500 billion ruble ($20 billion) injection into financial markets to stem a dizzying plummet in share prices - and quash fears of a repeat of the country's 1998 financial collapse.
CKA Super Elite 
CKA Moderator 
CKA Moderator 
