World banks continue to try to avert credit crunch

| August 10, 2007 | 0 Comments
World banks continue to try to avert credit crunch

Banks around the world have been pumping money into financial markets, in a desperate attempt to stabilise them against a credit crunch that could lead to recession.

The European Central Bank (ECB) took the lead, with an injection of 95 billion euros, which was soon followed by the US Federal Reserve’s injection of $24 billion.

Asian banks followed, with the Bank of Japan injected a trillion yen, equivalent to around $8.5 billion (£4.2 billion). The Reserve Bank of Australia also pumped in almost A$5 billion, while the central banks for Malaysia, Indonesia and the Philippines began dollar sell-offs in order to support their currencies.

South Korea, one of the biggest holders of US dollar and gold reserves, is also poised to take action as necessary.

The underlying cause is the worsening crisis in the US subprime market, with CDO’s and other bonds based on loan values derived from US mortgage sales continuing to be valued as worthless.

French Bank BNP Paribas added fuel to the fire by suspending three investment funds - wiping out 2 billion euros of value - and continuing a trend of effectively destroying funds as worthless rather than attempting to buy back at a fair price.

At the heart of everything is the fear of a credit crunch - where companies will no longer be able to borrow so easily as banks and other lending institutions become risk averse.

The big fear behind the recent banking investments into financial markets is that without easy access to loans, economies around the world may lose much of their momentum, end up facing recession.

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