Central banks fight back

Central banks and regulators around the world fought back against the storm in global financial markets yesterday, offering $180bn of liquidity to banks outside the US that are desperate for dollars, while the UK took the drastic step of banning the short-selling of financial stocks.
The Federal Reserve gave central banks in Japan, the eurozone, the UK, Switzerland and Canada the $180bn to lend on to local banks that cannot access its onshore dollar lending facilities, at least temporarily stopping the crisis from lurching further out of control.
The central banks said they were taking “co-ordinated measures designed to address the continued elevated pressures in US dollar short-term funding markets”. They promised to “continue to work together closely” and to take “appropriate steps to address the ongoing problems”.
The flood of dollars had some success in bringing down overnight borrowing rates that had hit extraordinary levels on Wednesday and brought barometers of systemic stress back from historic highs.
However, markets remained under enormous pressure, and the cost of borrowing money for periods of more than a few days went up, not down, in spite of the central bank operation. Many expect further giant liquidity operations in the coming days.
The UK ban on short-selling follows tough new restrictions by the US earlier this week. Shares in State Street, a custodian bank, plunged 29 per cent on the news.
Short-sellers in Britain have been blamed for driving down the share price of HBOS, the banking group that on Thursday revealed it was being rescued through a takeover by Lloyds, its UK rival.
Market stress continued to be exacerbated by fears of a wave of withdrawals from US money market funds after one of the oldest institutions broke the industry's golden rule by losing investors' money because of exposure to Lehman Brothers debt.
Experts said the giant liquidity operation might not be enough to end the extreme stress in the market. “The financial system is incredibly vulnerable,” said Ken Rogoff, a former chief economist at the International Monetary Fund.
Overnight interbank dollar rates dropped sharply, with London-based dollar Libor down 1.19 percentage points to 3.8 per cent at the mid-morning fixing, which is still high above US policy rates. However, three-month dollar Libor rose 0.14 percentage points to 3.2 per cent.