U.S. PLOWS $30 B INTO OVERSEAS MONEY MARKETS
WASHINGTON, SEPTEMBER 25, 2008 (STAR) The Federal Reserve, in coordinated action with foreign central banks, plowed $30 billion into money markets overseas yesterday, part of an ongoing effort to fight a global credit crisis.
The Fed’s action sets up temporary “swap” arrangements to supply dollars to the central banks of Australia, Denmark, Norway and Sweden in exchange for their currencies.
“These facilities, like those already in place with other central banks, are designed to improve liquidity conditions in global financial markets,” the Fed said. “Central banks continue to work together during this period of market stress and are prepared to take further steps as the need arises.”
Most Asian stock markets edged higher yesterday as Warren Buffett’s plan to invest at least $5 billion in Wall Street firm Goldman Sachs helped allay fears about the world’s troubled financial sector.
Last Tuesday, uncertainty prompted fresh turmoil on financial markets as the main global stock markets were hit hard over US lawmakers’ opposition to the rescue package. (Story on B-1)
The Fed’s new swap arrangements will provide up to $10 billion each to the central banks of Australia and Sweden and $5 billion apiece to the central banks of Denmark and Norway.
Last week, the Fed and other foreign central banks pumped as much as $180 billion into money markets overseas. The European Central Bank, the Bank of Japan, the Bank of England, the Swiss National Bank and the Bank of Canada participated in that maneuver.
The global credit crisis poses a danger not only to the US economy but also the world economy.
Finance officials from the world’s major economic powers pledged this week to do all they can to provide relief.
The Group of Seven countries said they welcomed the extraordinary steps by the United States to stem the crisis, including a plan for the Treasury Department to buy $700 billion in bad mortgages and other toxic assets held by banks and other financial institutions. Those dodgy debts are at the heart of the crisis. Besides the United States, the Group of Seven is made up of Japan, Germany, France, Britain, Italy and Canada.
Buffetted Billionaire investor Buffett’s Berkshire Hathaway Inc. will invest $5 billion in Goldman, a major boost for the Wall Street bank whose shares fell 50 percent from their 2007 record high in this month’s market turmoil.
However, the news failed to significantly boost risky assets after the US government’s push for quick congressional approval of its financial rescue plan hit a wall of opposition on Tuesday among senators who said the plan puts taxpayers at risk.
Federal Reserve chairman Ben Bernanke testifies again later, after warning lawmakers on Tuesday that a failure to act could doom the economy to a recession.
“The market is still nervous about the outcome of the proposed US plan as politics seems to be making the deal more complicated,” said Ryuji Shimai, market analyst at Shinko Securities in Tokyo.
In Japan, the benchmark Nikkei 225 index climbed 0.2 percent to close at 12,115.03 after languishing for much of the day in negative territory.
Hong Kong’s Hang Seng Index climbed 0.5 percent to 18,961.99 points. Stock measures in mainland China, Australia and South Korea were higher, while Taiwan lost ground and Singapore finished flat.
A number of financial issues gained on news that Buffet’s Berkshire Hathaway Inc. was investing in the Goldman Sachs Group Inc., a show of confidence in a company that has weathered Wall Street’s financial turmoil better than most.
Wednesday’s advance, though, was limited by investor anxiety over the outcome of US congressional debate of the government’s $700 billion rescue plan for the financial sector.
“It helped investors for overall sentiment for now,” Castor Pang, an analyst at Sun Hung Kai Financial in Hong Kong, said of Buffett’s move. “But long term there are still concerns about the banking sector. Many are still cautious about the U.S. rescue plan.”
Japanese banks were higher, with Nomura Holdings Inc., the country’s biggest brokerage, jumping 5.2 percent after announcing it would buy bankrupt firm Lehman Brothers’ operations in Europe and the Middle East.
Top Japanese bank Mitsubishi UFJ Financial Group Inc. advanced 4.2 percent. Sumitomo Mitsui Financial Group Inc., Japan’s third-largest bank, added 1.18 percent amid media reports that it’s considering investing in Goldman Sachs.
Leading Australian investment bank Macquarie Group Ltd surged almost 11 percent. China Life, the country’s largest insurer, was up 3.1 percent.
China’s shares have gained, led by oil giant Sinopec and phone company China Unicom, led by oil giant Sinopec and phone company China Unicom following government steps to support the market.
Chinese banks, however, bucked the regional trend and declined despite buying by a state fund.
In Hong Kong, hundreds of customers descended on branches of Bank of East Asia to demand their deposits back after the bank was hit by unconfirmed rumors questioning its stability.
The mid-sized lender insisted that “malicious” rumors spread by cell phone text messages in recent days had no basis in fact. Deputy Chief Executive Joseph Pang told reporters that the bank “is not suffering from financial difficulties” and that it had enough cash to handle the needs of depositors. – AP
Amid slowdown, RP won’t need IMF intervention By Des Ferriols Thursday, September 25, 2008
The Philippines will survive the global slowdown without seeking intervention from the International Monetary Fund (IMF) even if oil prices were to return to record 2008 levels next year.
Remittances from overseas Filipino workers, together with the trickling in of foreign investments and export earnings, would ensure that the country has healthy foreign exchange reserves that would make external intervention unnecessary.
The IMF said yesterday that some 50 developing countries were at risk until 2009 as a result of food and fuel price increases, based on its updated assessment of the macro-economic impact of these price shocks.
IMF Managing Director Dominique Strauss-Kahn said in a statement that while the international community was currently focused on the ongoing financial crisis in advanced economies, “it is important not to lose sight of the ‘other crisis’ – the continued debilitating impact of food and fuel hikes on some of the world’s poorest countries.”
“While food and fuel prices have eased somewhat in recent months, they remain well above their levels at the onset of the recent price surges,” said Strauss-Kahn.
“What this means for a large number of countries – particularly in Africa – is a significant shock,” he added.
According to the IMF, food and oil prices peaked in early summer this year, with oil prices reaching levels predicted in the Fund’s worst-case scenarios when it made its assessment in June.
“Against this background, the effects of higher prices on the balance of payments, budgets, and domestic prices intensified,” the IMF said in its assessment, adding that a large group of low- and middle-income countries was experiencing a substantial weakening of their balance of payments as well as higher inflation.
These findings, according to the IMF, reinforce the importance of adopting what it called “appropriate policies” to maintain macroeconomic stability while protecting the low-income families.
Fortunately, however, the build-up in the country’s reserves in recent years that continued this year despite high oil prices would keep the country afloat even under the new worst-case scenario of the IMF.
The IMF document shows that should oil prices drop lower in 2009, thus lowering the oil price shock, the country’s current account would bounce back to 1.3 percent of gross domestic product (GDP) from the baseline figure of 0.4 percent of GDP.
Under this scenario, the country’s reserves would increase to the equivalent of 5.5 times the country’s imports of goods and services.
In contrast, the IMF said reserves of equivalent to less than three months’ worth of imports were considered too low.
If oil prices were to revert to the 2008 peak, the IMF said the Philippines’ reserves would still be respectable, although it would decline to 4.8 times worth of imports while the current account would finally lose its surplus and drop to negative 0.4 percent of GDP.
IMF assistance is normally needed for balance of payments support but these numbers indicate that while the country’s BOP might decline, it would not necessarily lead to dropping back into IMF.
The Philippines has actually become one of the net lenders in the IMF after over 40 years of being in debt with the Fund. The country paid the last of its obligations last year and for the first time in four decades, was free of any obligation from the IMF where it was considered a prolonged user of funds with 23 IMF-supported programs since 1962.
However, Strauss-Kahn said the IMF’s updated assessment shows that the impact of food and fuel price increases on developing countries, far from diminishing, has continued to mount since its previous report last June.
As of mid-September, the IMF said oil prices were at some 40 percent below their mid-July peaks, but still double the levels recorded at end-2006.
Similarly, food prices have eased 8 percent from their June peak but are still above end-2006 levels.
As a result, the IMF projects that net fuel-importing low-income countries are facing an increase in their fuel bill equivalent to 3.2 percent of their GDP – or $60 billion.
For 43 net food-importing countries, the rise in their food bill is 0.8 percent of GDP – or $7.2 billion.
“From a macroeconomic perspective, we see the effects in weakening balance-of-payments positions and national budgets – and acceleration of inflation,” said Strauss-Kahn. The average inflation rate for low-income countries increased by almost 3 percentage points during the second quarter of 2008, and was expected to exceed 13 percent by the end of this year.
“As we all know, inflation hurts everyone, but it especially hurts the poor,” Strauss-Kahn said.
He said the costs of the fiscal policy response to the food and fuel crisis also have continued to increase.
Countries have responded to rising prices primarily by reducing taxes and tariffs, increasing universal subsidies, expanding transfer programs, and increasing public sector wages.
The IMF’s updated assessment showed that in 24 countries, the combined fiscal cost from rising food and fuel subsidies was expected to exceed 2 percent of GDP. The report also pointed out that these subsidies were almost always poorly targeted in terms of reaching those people most in need.
The IMF said the key was to bring inflation back under control, but would require a robust monetary policy stance – tightening where necessary and avoiding unsustainable wage increase.
The IMF also said there should be a shift to better-targeted social safety net programs to protect the poor in a more cost-effective manner.
Chief News Editor: Sol Jose Vanzi
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