Published October 14, 2008

Stocks rebound as Europe gets to heart of the problem

Guarantees may let funds flow easier; relief shows in interbank markets

By CONRAD TAN

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(SINGAPORE) Stocks in Asia rebounded yesterday, cheering a move by governments in Europe and elsewhere to back virtually the entire banking sector with money from the public purse.

Shares in Asia got an early boost as European governments reached an unprecedented agreement to guarantee hundreds of billions of dollars in new debt issuance by banks until end-2009 and inject cash directly into banks badly in need of capital, following a blueprint laid out by the UK government last week.

Later in the day, the Bank of England, European Central Bank and Swiss National Bank said they would offer unlimited amounts of short-term US-dollar funding, in a further attempt to ease interbank strains and lower borrowing costs.

Banks 'will be able to borrow any amount they wish against the appropriate collateral in each jurisdiction', the central banks said in a joint statement.

Australia and New Zealand said they would guarantee all bank deposits, while Indonesia raised the limit on the amount of deposits guaranteed to 2 billion rupiah (S$304,000) from 100 million rupiah previously.

News that the UK government would inject &pound37 billion (S$93.8 billion) into three of the country's biggest banks - Royal Bank of Scotland, Lloyds TSB and HBOS - also raised hopes that the crisis of confidence sweeping the financial sector could finally be tamed by effectively nationalising large swathes of the financial sector. Barclays said separately that it would raise &pound6.6 billion from private investors, escaping a government bailout.

Earlier attempts to stem the panic gripping investors - including a US$700 billion rescue plan to buy up soured assets from the US banking sector, synchronised interest-rate cuts last week by the world's biggest central banks, and a desperate flooding of banking systems with increasingly large amounts of liquidity - had all failed to unblock credit channels crucial to the normal functioning of financial markets and economic activity.

The latest moves are aimed squarely at what leading economists say is the true heart of the unfolding crisis: insufficient capital in the banking system relative to the losses that banks face, and a deep mistrust between financial institutions that has brought much interbank lending activity to a virtual standstill, threatening to choke off the supply of credit to the broader economy.

In Asia and elsewhere, investors were cheered yesterday by hopes that policymakers were finally coming up with a workable solution that could restore the normal flow of funds to ordinary businesses and individuals.

The Hang Seng Index was by far the biggest gainer in the region, soaring 10.2 per cent to recoup some of the losses suffered last week, when it plunged 16.3 per cent.

Shares there were also boosted by comments from Hong Kong officials over the weekend, who said that the government may use its foreign reserves to provide support to its financial markets.

Here, the Straits Times Index rose 6.6 per cent, after a day of volatile trading which saw the index give up its opening gains to trade below Friday's close at one point. Last week, the stock benchmark fell a staggering 15.2 per cent.

'I think the unified move by the global central banks injected a much needed dose of confidence into the market, especially where credit markets are concerned,' Brandon Lee, an analyst with DMG & Partners Securities, told Bloomberg.

'Given the importance of credit to the property sector, it is not surprising that stocks here have rallied.'

Markets in Japan were closed for a holiday.

In Asia and Europe, relief at the concerted action by governments and central banks worldwide was palpable.

In the money markets, interbank lending rates eased from their stubborn highs last week. Credit markets also responded positively, with indices tracking credit-default swap spreads - a measure of the perceived risk of the underlying companies or governments defaulting on their debt - falling sharply.

Last Friday, stock markets in Asia and Europe suffered an almost complete meltdown, capping the worst weekly crash since at least 1987.

The Monetary Authority of Singapore (MAS) said in a statement yesterday that the financial system here 'remains stable and robust'.

'Our domestic Singapore-dollar money and foreign-exchange market have generally been calm, and banks have been able to obtain funding in the interbank market.

'No extraordinary measures have been needed. Singapore-dollar interest rates remain stable.'

Last Friday, MAS eased its stance on the Sing dollar in its scheduled twice-yearly monetary policy statement, triggering a fall in the currency against its major counterparts, which is expected to provide some relief to exporters here and cushion the blow of slowing demand in some of Singapore's biggest trading partners.

Yesterday's move by Europe's governments to guarantee new issues of medium-term debt by banks - paving the way for the banks to raise new capital in an environment where private sector investors are shunning nearly all types of debt securities - came after Dominique Strauss-Kahn, managing director of the International Monetary Fund, warned over the weekend that the global financial system was on 'the brink of systemic meltdown'.