[NYTr] Central bankers worry whether action plan will work

[All the News That Doesn't Fit]

Reuters - Dec 14, 2007
http://www.reuters.com/article/ousiv/idUSL1339203520071214


Central bankers worry whether action plan will work

By Mike Peacock

LONDON -- Top European central bankers expressed concern on Friday
about the success of a concerted action plan to grease the wheels
of seized-up money markets, as U.S. banking giant Citigroup faced
fresh strife.

European Central Bank Governing Council member Klaus Liebscher said
he was disappointed money market rates remained at 4.8 to 4.9 percent
despite a planned liquidity injection by the world's major central
banks.

"There is a certain concern that the money market is not coming
down," Liebscher told reporters in Vienna.

His ECB colleague, Yves Mersch, said it was unclear if Wednesday's
joint initiative to lower sky-high interbank lending rates would
be enough to turn the corner.

"Whether it's sufficient to restore confidence remains to be seen,"
Mersch said at a news conference in Luxembourg.

"In the immediate aftermath dollar spreads in term funding reduced
to some extent ... but are still at high levels," he said. "We are
partly facing a confidence crisis among banks."

The Federal Reserve and counterparts in Europe, Canada and Britain
announced joint action -- the Fed launched a temporary facility to
let a wider number of banks borrow at favorable rates, and catered
for affected foreign institutions via foreign exchange swap lines
with the ECB and Swiss National Bank.

In response, money market rates edged lower but not by much.

Most London interbank offered rates (LIBOR) dipped on Friday for
the second day in a row, but again only by a little -- the euro
one-month rate fell only slightly to 4.93375 percent from Thursday's
4.93500 and two-week rates rose to 6-1/2 year highs.

ECB Governing Council member Nout Wellink said the credit crisis
had now reached a "second wave", worse than the first.

"It is too early to tell whether the action will work," he was
quoted as saying by Dutch newspaper De Volkskrant, telling another
newspaper that if the first central bank injections proved insufficient,
further action must be considered.

Most experts say the crunch, which first bit in August when interbank
lending dried up as banks realized they did not know which was
dangerously exposed to a U.S. subprime mortgage meltdown, would
only end once they trusted each other again.

"The market has just dried up. The only way it will improve is if
Bank A lends (to) Bank B again," one money market trader said. "It's
very simple but very difficult. It's a question of trust."

Subprime mortgages -- lent to people ill-equipped to pay them back
-- were bundled up into complex financial products and sold on
around the globe.

Uncertainty about where the exposure lies remains intense.

Wreckage on financial balance sheets continues to mount.

U.S. banking giant Citigroup said on Thursday it planned to rescue
$49 billion of "structured investment vehicles", in a move that
further strains its capital levels and may scupper a U.S.
government-endorsed SIV bailout plan.

Moody's Investors Service downgraded its ratings on Citigroup debt
one notch to "Aa3," saying it doubted the largest U.S. bank would
succeed in rebuilding its capital ratios any time soon as it wrestles
with billions of dollars of assets whose market value has declined.

Citi's decision to move SIV assets to its balance sheet further
ties up its capital in assets likely to produce low returns,
potentially hampering the bank's profitability and highlighting the
balance sheet constraints hobbling some big institutions at the
year-end.

Questions are being posed about a planned "superfund" to bail out
investment vehicles tied to the subprime mortgage market, with
reports circulating that some banks which were expected to help out
were losing interest as they doubted its ability to provide a
solution to the credit crunch.

Lehman Brothers Holdings Inc said on Thursday that quarterly earnings
fell 11 percent, hurt by write-downs in bond trading, although
results beat analysts' average expectations.

And on Wednesday, Bank of America and Wachovia Corp warned of further
write-downs for the fourth quarter.

The chairman of the Eurogroup of euro zone finance ministers said
on Friday the turmoil would last well into 2008 and cause slower
European growth.

"I think the financial crisis will occupy us for a good while in
2008. We will have to say in what way and in to what degree the
financial turmoil will impact the real economies," Luxembourg premier
Jean-Claude Juncker told France Inter radio.