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Rising market pressures may trigger third wave of credit crisis

Business Times – 11 Mar 2008

Nervous investors hanging on to pronouncements of central bankers

(LONDON) Tight money markets and tumbling stocks and the US dollar are expected to increase worries for investors this week as pressure mounts on central banks facing what looks like the third wave of a global credit crisis.

Last week, money markets tightened to levels not seen since December, when year-end funding problems pushed lending costs higher across the board.

In response, the Federal Reserve unveiled new measures to ease liquidity strains on Friday – injecting US$200 billion into the banking system – and said that it was in close consultation with central bank counterparts.

However, the Fed failed to lift the mood much. Investors, keen to see if any further plan is in the works to prevent a financial market seizure, will scrutinise words from key central bankers including Fed officials this week.

‘It’s another round of the credit crisis. Some markets are getting worse than January this time,’ said Jesper Fischer-Nielsen, interest rate strategist at Danske Bank in Copenhagen. ‘There is fear that something dramatic will happen and that fear is feeding itself. Central banks have shown great resolve to try to solve the problems (on money markets) and I’m sure they will do again.’

Philipp Hildebrand, vice-chairman of the Swiss National Bank, warned last week that the world might be in a new, more dangerous phase of the crisis.

If that is the case, the latest wave is the third one.

The first round began in August when interbank lending dried up as banks realised they did not know which was dangerously exposed to the meltdown in the US sub-prime mortgage market.

Then, late last year, pressure intensified again in the money markets – after some of the world’s biggest banks began writing off colossal sums of money – prompting top central banks to inject billions of dollars into the system.

Renewed problems in the credit market – including fears that US mortgage lender Thornburg might go bankrupt and acute cash flow problems at a Dutch fund – and concerns over slowing world growth led to a sell-off in stocks last week.

World stocks, as measured by MSCI, fell more than 3 per cent on the week while the dollar lost more than one per cent to hit record lows against a basket of six major currencies at one point last week.

Also reflecting investor jitters, two-year US Treasury yields hit a four-year low below 1.5 per cent as investors flocked to government bonds.

The cost of corporate bond insurance hit record high levels on Friday and parts of the debt market are also getting hit.

‘A funding freeze by lenders, that appears already in progress, could cause first-round casualties in Spain, Italy, Ireland, Portugal, Greece and Austria, countries collectively identified as the euro zone liability group,’ a UBS note said.

The G-10 policymakers came up with a cash injection plan late last year, with the top five central banks injecting liquidity into banks.

However, after weeks of calm, stress is building up again in money markets.

‘The level of financial stress is . . . likely to continue to fuel speculation of more immediate central bank action either in the form of increased liquidity injections or an early rate cut,’ Goldman Sachs said in a note to clients\. \– Reuters

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