Li Keqiang's India Visit
Chinese Premier Li Keqiang, smiling and effusive, was out to smooth ruffled feathers in India this week, promising to ease tensions and increase trade between Asia's fastest growing economies in his first trip overseas since taking office. Full Article | Slideshow
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IMF calls for guarantees to unfreeze money mkts
LONDON/BEIJING (Reuters) - Central banks pumped huge amounts of short-term funds into paralysed money markets on Friday as the world's attention turned to Washington where global finance leaders meet this weekend to discuss the deepening crisis.
Investors across all asset classes will look to Group of Seven finance ministers and central bankers, and International Monetary Fund for coordinated action to help arrest the panic that has frozen money markets and sent stock markets into a tailspin.
IMF chief Dominic Strauss-Kahn on Friday called for a temporary guarantee of all interbank deposits.
"This means not only retail bank deposits but probably also interbank and money market deposits, so that activity may restart in these key markets," Strauss-Kahn told a conference in Washington.
"Of course, such a step should be temporary and include safeguards such as heightened supervision and limits on deposit rates offered," he added.
Strauss-Kahn's comments followed another day of turmoil on global financial markets and virtual paralysis on money markets, which had prompted yet more liquidity provisions from monetary authorities around the world.
The European Central Bank and Bank of England injected a combined $132 billion of one-day and one-week dollar liquidity into the European banking system.
In Asia, Singapore cut interest rates for the first time since 2003 and the Bank of Japan injected a record 4.5 trillion yen ($45.5 billion) in same-day funding.
Investors dumped government bonds and scrambled for cash as insurer Yamato Life went bankrupt, selling that was also mirrored in European and U.S. government bond markets in the scramble for cash.
The Reserve Bank of Australia injected A$2.63 billion ($1.8 billion) into the banking system, adding about A$790 million more than the estimated need in an effort to ease funding pressures.
"With money markets disintegrating, the financial system is at risk. The deleveraging we thought should take place over years looks set to be brought about by dysfunctional funding markets in a matter of weeks." said Dresdner Kleinwort in a note to clients on Friday.
Despite the myriad measures from individual central banks and governments, the deepening dislocation -- in equity, credit, interbank, fixed income and currency markets -- is increasing the clamour for coordinated action.
"Most euro zone governments have relied mostly on political promises of rescue if needed (but) we doubt stability will be restored until these promises are converted into concrete actions, preferably with an interbank guarantee," Goldman Sachs' European economists wrote in a note on Friday.
At the British Bankers Association's daily fixing of London interbank offered rates (Libor) on Friday, overnight sterling rates jumped, as dealers reported some UK banks faced a shortage of cash.
Sterling overnight Libor was fixed almost 40 basis points higher at 5.81250 percent , more than 140 basis points above the Bank of England's new target rate of 4.5 percent.
This contrasted with overnight dollar and euro rates, which both fell closer to central banks' new, lower targets following the coordinated global cut in interest rates earlier this week.
Three-month euro Libor also fell but was among the few signs aggressive government and central bank action to unfreeze money markets may be working.
Otherwise, the Libor fixings showed banks' lending rates to each other -- for the limited lending being conducted -- remain high.
The sense of distrust and fear in money markets was reflected by the latest data from the ECB that showed how much euro zone banks deposited at the central bank on Thursday rather than lend out.
Euro zone banks deposited 64.364 billion euros of overnight funds at the ECB, up from 39.831 billion euros the previous day.
The BoE, meanwhile, said it will offer 40 billion pounds in a three-month repo operation next week, and will conduct two $30 billion auctions a week until further notice.
In the United States, banks borrowed a record $420 billion per day from the Federal Reserve in recent days -- greater than the size of the economy of Belgium -- as financial institutions continued to rely on the lender of last resort.
High interbank lending rates have stymied funds from flowing into other parts of the money markets such as commercial paper, which continued to contract despite Federal Reserve support.
While lower overnight interest rates will prevent further deterioration in the global credit crisis for now, elevated term borrowing costs will hurt cash-strapped companies and consumers in the long run.
That's why some sort of interbank guarantee from the G7 this weekend might be the only way to get the money market wheels turning again.
"Given the trillions of dollars of credit that has already been extended by the Treasury and the Fed, this action would appear to involve a manageable price tag -- especially since it directly addresses the most immediate problem plaguing the credit markets and overall economy," said David Greenlaw, economist at Morgan Stanley.
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