U.S., Europe Move to Raise Liquidity in Capital Markets

The United States and Europe have made a number of moves to inject much-needed liquidity into their capital markets.

In Europe, the United Kingdom announced a large-scale rescue plan to prop up its ailing banks, and other nations raised the ceiling on deposit insurance to ease financial jitters.

In the United States, financial authorities will purchase commercial papers to relieve businesses from difficulties and cut the benchmark interest rate by half a percentage point.

The American and European governments are apparently striving to stimulate the free flow of money in their markets, which is unlikely to appear soon.

○ Europe’s struggle

London announced a 50-billion pound (87.4 billion U.S. dollars) bailout plan to prevent the British banking system from collapsing.

Before his country’s stock market opened, British Finance Minister Alistair Darling announced an injection of public funds and aid to eight large financial institutions to raise their capital.

The eight are HSBC, Standard Chartered, Barclays, Abbey, HBOS, Lloyd’s TSB, Royal Bank of Scotland and Nationwide Building Society.

The British government will channel public capital via the purchase of preferred shares, partially nationalizing major banks by acquiring shares.

To weather criticism that the government is using taxpayers’ money to bail out the institutions, London set certain conditions while putting a ceiling on the compensation given to executives and common stock dividends.

Economists said the British bailout plan differs from that of the United States, but is similar to Sweden’s in the 1990s.

London will also establish a state-run agency providing up to 250 million pounds in inter-bank lending guarantees.

Spain also announced the setup of a new fund worth 30 billion euros (40.8 billion dollars) to prop up its financial market, saying the amount could rise up to 50 billion euros (68 million dollars).

France is also considering measures to buy bank shares with taxpayers’ money.

French government spokesman Luc Chatel quoted French President Nicolas Sarkozy as saying, “The French government will not sit idle while seeing its banks go bankrupt. We’re ready to rescue French banks if they face bankruptcy fears.”

○ U.S. slowdown to continue next year

The U.S. Federal Reserve Board will buy commercial papers issued by businesses or banks to borrow short-term funds to ease the credit crunch in short-term capital market.

The Fed’s support measures had been limited to providing liquidity for financial institutions, including commercial banks.

Experts said the decision shows the U.S. short-term capital market faces problems worse than expected.

Commercial papers have been bought by money market funds. As the funds’ purchase of commercial papers has drastically decreased, many businesses face difficulty in borrowing money.

To let money flow to businesses, the Fed made the unprecedented decision to buy commercial papers with taxpayers’ money.

The Treasury Department will make a special deposit at the Federal Reserve Bank of New York to support the program, with the amount remaining undisclosed.

After hesitating to slash the federal funds rate due to inflation worries, the Fed cut its benchmark interest rate from two percent to 1.5 percent yesterday.

In a speech at the National Association for Business Economics, Fed Chairman Ben Bernanke said, “Overall, the combination of the incoming data and recent financial developments suggest that the outlook for economic growth has worsened and that the downside risks to growth have increased.”

“In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate.”

Bernanke warned that the U.S. economic slowdown will continue next year due to the global financial crisis.

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