Central banks inject billions
By JOHN PARTRIDGE
Thursday, September 13, 2001
Central banks and governments fought back with lofty rhetoric and billions of dollars Wednesday in an effort to keep global payments systems functioning and stem fears of a worldwide recession, following Tuesday's devastating terrorist attacks on New York and Washington.
The U.S., European, Japanese and Canadian central banks alone pumped well over $100-billion (U.S.) into the international payments system in a co-ordinated effort to avoid financial gridlock, as U.S. and Canadian financial markets remained closed for the second day in a row.
The Bank of Canada, for example, made an additional $1-billion (Canadian) a day available both Wednesday and Tuesday to help Canadian banks settle transactions, 20 times the daily amount it provided over the preceding three business days.
The U.S. Federal Reserve Board, meanwhile, injected $38.35-billion (U.S.) in temporary reserves, about 10 times the daily average, according to a U.S. economist quoted by Reuters.
The European Central Bank provided an infusion of about $63.23-billion, while the Bank of Japan kicked in about $16.7-billion.
The object of the exercise is to allow banks to complete transactions even if payments cannot be immediately sent electronically to, from or through New York, because of damage to telecommunications systems.
"They're trying to prevent gridlock in the system, where people can't make payments out, because they're not getting payments in," said one Canadian banker. Banks simply borrow enough funds to settle transactions for the day from their central bank and repay it the next day when they have received the delayed payment from the party on the other end of the transaction.
Along with the billions of dollars in financial lubrication, bold words also flew in abundance.
"Acts of evil will not cripple the markets," U.S. Deputy Treasury Secretary Kenneth Dam said at the agency's first major briefing since terrorists hit at the heart of the U.S. financial system Tuesday by flying hijacked airliners into the twin towers of New York's World Trade Center, obliterating them.
"Our financial system is, and remains, strong. The American economy is open for business."
Canadian Finance Minister Paul Martin issued a statement saying that Canada's financial system, too, is sound and that the Bank of Canada will continue to provide liquidity.
"In the wake of these deplorable events, I have been in contact with United States Treasury Secretary Paul O'Neill and a number of my other G7 counterparts during the last 24 hours. We are confident that the international financial system is stable and secure," Mr. Martin said, adding that the Toronto Stock Exchange will reopen Thursday.
As well, the G7 said its members "are committed to ensuring that this tragedy will not be compounded by disruption to the global economy."
The International Monetary Fund issued a statement saying it expects Tuesday's horrific events to have only a limited impact on the international economy and global financial system. "We can take encouragement from the fact that the monetary institutions and systems are working well, which demonstrates a fundamentally resilient international financial system," IMF managing director Horst Koehler said.
There also were indications that commercial banks have put aside some of their rivalries, at least for now.
"I'm hearing there has been unprecedented co-operation between banks around the world, in terms of maintaining liquidity and helping each other out," a senior executive at one Canadian bank said.
"People who normally fight like cats and dogs for every basis point don't seem so worried about it today. If the world pulls together, that's a good thing."
Bank of Nova Scotia chief economist Warren Jestin called the central banks' actions "a no-brainer," saying that, as lenders of last resort charged with trying to provide orderly markets, they have to try to prevent disruptions.
"You've got to remember that you don't have two-way markets right now, because the markets are basically closed down."
As well, the central banks will continue pumping funds into the system, he said, until markets return to some semblance of normality. "That's their job."
However, Mr. Jestin said the terrorist attacks on New York were different from previous events in which the central banks have stepped in en masse.
"First of all, it struck right at the heart of the financial system," he said. "This is not collateral damage to something else."
Secondly, he said, it is "very truly a global hit," because New York is the dominant player in world financial markets and those markets "have spent the last 15 years becoming almost totally integrated in electronics."
With files from Reuters