World's major central banks move to boost markets

Updated On: Dec 01, 2011

The world's major central banks have acted jointly to provide cheaper dollar funding to European banks, in response to the region's debt crisis. IMF chief Christine Lagarde has hailed the move. Separately, China's central bank has cut the reserve requirements for commercial banks in China, also freeing up more credit for financial markets.

Meanwhile, United States President Barack Obama says he is optimistic Congress will reach an agreement to extend a cut on the payroll tax workers pay. Congress has until the end of December to decide. Economists predict great harm to the US economy if the payroll tax cut is not extended.

Central Banks Move

The emergency move by the US Federal Reserve, the European Central Bank, and the central banks of Japan, Britain, Canada and Switzerland is similar to coordinated action to stabilize global markets after the collapse of Lehman Brothers, which triggered the 2008-2009 financial crisis. Western and Asian markets have reacted positively to the latest central bank action.

According to a commentary published by the Wall Street Journal, the agreement to expand so-called currency liquidity swap arrangements demonstrates that central banks are not willing to sit by and wait for the Eurozone to fix itself. From a European perspective, it is also encouraging to see the US Federal Reserve prepared to intervene on Europe's behalf in any quantity at all. But some American taxpayers may be less keen on the Fed putting their dollars on the line.

Meanwhile, German Finance Minister Wolfgang Schaeuble says his country is open to increasing the International Monetary Fund's resources through bilateral loans or more special drawing rights. This is a reversal from Germany's earlier stance at the Cannes G20 summit.

The new openness to a bigger IMF role came as Germany presses its EU partners to agree next week on treaty changes to create coercive powers to make euro countries change their budgets if they breach European Union deficit and debt rules.

European officials are meeting on 9 December in Brussels, and some analysts see the upcoming summit as a make-or-break moment for the euro. Although leaders have agreed on measures so far, they have yet to fully restore confidence in Europe.

Report: Central banks act as euro zone crisis rages [Reuters, 30 Nov 2011]

Analysis: Central Banks' Action Hints At U.S. Fears [WSJ, 1 Dec 2011]

China Central Bank Keeps Credit Flowing

Over in China, the country's central bank has also freed the nation's commercial banks to lend more money.

The announcement by China's central bank was separate from the measures taken by Western and Japanese bankers to pump more money into the European banking system. Western officials have confirmed that Beijing's move was not done in coordination with theirs.

Still, China’s motive was similar: to keep credit flowing through the financial markets.

Beijing’s action allows commercial banks to slightly reduce the percentage of their deposits that they must keep on reserve at the central bank. The change means that commercial banks will have more money available to lend, which could help rekindle economic growth and help prevent a disastrous burst of China’s real estate bubble.

Real estate developers, small businesses and other borrowers have complained strenuously in recent weeks of weakening sales and scarce credit.

The central bank announced a 50 basis point cut of banks' reserve requirement ratio, effective from 5 December. The latest cut drops the deposit reserve requirement ratio to 21 percent for large commercial banks and 17.5 percent for mid- and small-sized banks. An estimated 396 billion yuan (US$62 billion) in capital will be released into the market.

This is the first such move by the People’s Bank of China in nearly three years. China's central bank previously prioritised restraining inflation.

According to a report by Xinhua, the move signals that China's government is attempting to stabilise economic growth after easing inflationary pressures. But it remains unknown if the change will bring about a full-on move toward a looser monetary policy.

Analysis: Inflation Fears Easing, China’s Central Bank Turns to Lifting Growth [New York Times, 30 Nov 2011]

Report: China's central bank to cut RRR 50 basis points [Xinhua, 1 Dec 2011]

IMF Chief Christine Lagarde on China, Europe

IMF Managing Director Christine Lagarde says the International Monetary Fund doesn’t expect the Chinese economy to stagnate in the near future, though growth will slow. She made the comments in an interview with El Comercio, a Lima-based newspaper.

Separately, Ms. Lagarde welcomed the joint action of major central banks to provide cheaper dollar funding to European banks.

She said "the joint action has shown extreme efficiency and has been well received by the markets."

Ms. Lagarde also told reporters in Mexico City that the IMF has no plans to bail out Italy and Spain in response to fears they may default on their debts.

"We have had no discussions whatsoever with Italy and Spain to negotiate any kind of program,” she said.

She called any talk of bailouts for the countries “rumours”, but added that “we stand ready to help, not just countries of the Eurozone.”

Report: IMF Sees Chinese Economy Avoiding Stagnation, El Comercio Says [Bloomberg, 1 Dec 2011]

Report: IMF welcomes advanced economies' decision to address debt crisis [Xinghua, 1 Dec 2011]

Report: IMF head says no plan to bail out Italy or Spain amid financial crisis [Washington Post (AP), 1 Dec 2011]

Obama Optimistic on US Payroll Tax Cuts, Europe

Finally, in the United States, President Barack Obama has expressed optimism that lawmakers in Congress could reach agreement to extend payroll tax cut, needed to avoid a "massive blow" to the economy.

At a fundraiser in New York, Mr. Obama said Republican congressional leaders John Boehner and Mitch McConnell had indicated in the past few days they were open to the one-year extension that Mr. Obama wants, to bolster the economy.

"It is possible that we see some additional progress over the next couple of weeks that can continue to help strengthen the economy and get us through what has been a very difficult period, not just for the United States but obviously for the world economy," Mr. Obama said.

Without congressional action by 31 December, the payroll tax that workers pay would revert to 6.2 percent, up from the current, temporary 4.2 percent tax. On average, this increase would cost American families about US$1,000.

Some economists have estimated that allowing the payroll tax cut to die would cause America's economic growth to fall by 0.75 to 1.5 percentage points.

Mr. Obama also expressed concern but cautious optimism about the situation in Europe.

"I am cautiously hopeful that they end up recognizing that they do need to do the right thing and we are providing them as much assistance as we can to make sure that the situation is stabilized because it will have impact all around the world," he said.

Report: Obama cites progress towards payroll tax cut [Reuters, 30 Nov 2011]

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