Action by central banks may not ease long-term issues

(EPA)   

Global equity markets rallied, bond markets sold off and money markets eased modestly after central banks announced for the second time in three months that they stand ready to provide liquidity to the world’s money markets.

But many analysts say changes to the US Federal Reserve’s securities lending programme and fresh additions of liquidity from several other central banks will do little to stop banks’ longer-term need for capital.

“Banks and levered players need equity infusions more than credit infusions and, while this will help at the margin, it won’t solve the longer-term problem of equity shortfalls,” said Pavan Wadhwa, head of European rates strategy at JPMorgan in London.

“Bank balance sheet constraints represent a bigger problem that is much harder for the Fed to solve than the problem of lack of liquidity,” said Wadhwa.

The Federal Reserve announced on Tuesday it had changed the terms of its securities lending programme, so that it includes AAA-rated private sector mortgage-backed securities and runs for a term of 28 days.

The changes will allow US primary dealers to deliver mortgage-backed securities, which banks and hedge funds are having trouble financing to the Fed in return for US Treasury securities, which can easily be used to raise cash.

The Fed also said it will be extending a swap facility to allow European banks to tap $30 billion (Dh1.1 trillion) in dollar funding through the European Central Bank and $6bn through the Swiss National Bank. The announcement came alongside announcements of expanded liquidity injections from other central banks.

The Bank of England said it will add £10bn (Dh72bn) in three-month funds in a special facility. The European Central Bank also called for bids in a renewed supplementary long-term refinancing operation with a preset intended volume of €60bn (Dh312bn).

The Bank of Canada will auction C$2bn (Dh7.42bn) in 28-day term purchase and resale agreements on March 20 and April 3. The co-ordinated announcement mirrored a move on December 12 last year, which came as global money market rates pushed higher on concerns banks would not have enough liquidity at the end of the year.

The spreads between three-month interest rate futures contracts and swaps, which represent the concern about credit risk in the money markets, eased after the statements. The US spread was at 47 basis points, seven basis points lower than  Monday, while the euro spread dropped 10 basis points to 47 basis points.

“I think the size of the Fed’s initiative is big but probably not big enough,” said Ralf Preusser, head of European rates at Deutsche Bank AG. (Agencies)