MercoPress. South Atlantic News Agency

Central banks try again to roof-patch housing-credit crunch

The world's largest central banks have launched their latest coordinated action to calm jittery credit markets. The US Federal Reserve, the European Central Bank and central banks in the UK, Canada and Switzerland will inject billions of dollars into money markets.

The news cheered investors and US stocks surged more than 3% - their biggest one-day gain in five years. The injection of cash is aimed at easing the global credit crunch and its impact on the wider economy. On Wall Street, the benchmark Dow Jones industrial average soared 416.66 points, or 3.55%, to close at 12,156.81. In London, the FTSE 100 index of leading shares ended 1% higher. Similarly in the money market the US dollar rose sharply against the yen and rebounded from a record low against the Euro. The authorities are worried that the credit crunch shows few signs of easing, eight months after the crisis began. In the UK, mortgage lenders announced a sharp slowdown in the number of home loans that are being approved due to the difficulties that many banks face raising funds on commercial money markets. The crisis in credit markets has threatened world economic growth and many expect the US, the world's largest economy, to enter a recession. Some argue the recession is already here. The problems in credit markets emerged last July/August when banks began revealing losses related to investments in the ailing US housing market. Record defaults on US home loans, especially to sub-prime borrowers with poor credit histories, caused the value of these assets to plunge and made banks reluctant to lend to each other. BBC Economics Editor Evan Davis questioned whether the central banks' actions would help re-instill confidence into nervous credit markets in the longer term. He says the banks' actions could help solve any liquidity problems - a temporary shortage of cash - faced by financial institutions, but would do little to ease worries about long-term solvency at some financial institutions. "We have been in a second phase of the credit crunch which has seen reluctance from banks to lend to each other not out of liquidity shortages, but out of a general worry that the banks they lend to won't be able to pay them back," he said. "It is, in other words, a crisis of confidence in bank solvency. It's not that banks don't have cash to lend; it's that they don't trust each other to have sufficient assets." Each of the central banks announced measures specific to their own markets, which follow on from similar emergency auctions of cash in December. The US Federal Reserve is making up to 200 billion US dollars available to financial institutions for 28 days instead of the usual overnight auctions. "Pressures in some of these markets have recently increased again" the US central bank said in a statement. "We all continue to work together and will take appropriate steps to address those liquidity pressures". Furthermore the Fed will also allow financial institutions to borrow the money using risky assets as collateral. These assets could include mortgage-backed securities which is precisely the source of the current crisis in credit markets. This means banks will be borrowing billions in super safe Treasury securities by using some of their more risky investments as collateral. The new Term Securities Lending Facility (TSLF) will provide financial institutions with 28-day loans of Treasury securities, rather than overnight loans. The institutions would pledge other securities â€" including federal agency residential-mortgage-backed securities, such as those of mortgage giants Fannie Mae and Freddie Mac â€" as collateral for the loans. Fed officials said it's the first time they'll be accepting mortgage-backed securities through this type of lending program. By allowing financial institutions to put up mortgage-backed securities â€" for which there's little market appetite â€" in return for safe securities that are in high demand, the Fed hopes to take pressure off financial companies and make them more inclined to lend to individuals and to businesses. Assuming Tuesday's action helps to stabilize turbulent financial markets, analysts believe that could reduce the chances that the Fed will order a deep, three-quarters of a percentage point cut in its key interest rate next week to further encourage lending and other economic activity. An increasing number of economists now believe the Fed is more likely to cut rates by a half-point, though that could newly roil Wall Street. The Fed is also extending a "swap lines" scheme that will provide 30 billion and 6 billion through the ECB and the Swiss National Bank respectively. The ECB is also making available another 15 billion despite having said on Friday that it had no plans to do so because the market problems that had made the last auctions necessary were no longer there. The British Bankers Association welcomed the auctions but called on the Bank of England to provide more details about them. "We would urge the Bank of England to provide greater clarity on the range of acceptable collateral, the minimum bid rate, and whether these operations will continue beyond April" director John Ewan said.