Fear and a loss of confidence are undermining Europe’s money markets, according to the head of the European Central Bank.
€42bn was pumped into the crisis-ridden world financial system this morning by the European Central Bank President, Jean Claude Trichet. That makes it €150bn in less than a month.
At the same time, America’s Federal Reserve has pumped billions into the US financial system, in its biggest intervention to stabilise the markets for a month. Here in the UK, the Bank of England left interest rates on hold.
But those huge sums haven’t solved the problem.
So today in a stinging rebuke, Trichet, the second most important person in world finance told the big banks and hedge funds to come clean about billions of pounds of suspected losses, blaming uncertainty about the scale of bad debts that have been building up.
I commend to you Faisal Islam‘s report on this story.
The use of the phrase “real economy” gets to me. “Is the credit crunch going to impact upon the real economy?” they ask. As if it hasn’t already affected real working people in the real world…
And by the way, I note that Brown is rather muted in his defence of the “real economy” these days. As The News Line‘s editorial remarks:
The Bank of England is already presiding over a bankrupt economy whose domestic debt of £1.4 trillion exceeds the country’s gross domestic product. It is an economy which is suffering a record balance of trade deficit, and whose currency the pound sterling is already being reckoned as being at least 30 per cent over-priced.
If it gives in to the modern ‘South Sea Bubble’ merchants it risks its own bankruptcy through touching off a run on the pound sterling that will trigger the greatest shares, and house price crash in history. The baying for it to do just this is getting louder and louder.
This is taking place in the allegedly ‘fundamentally sound’ economy that Prime Minister Brown, not so long ago claimed was his creation, after he had sold off a good portion of the country’s gold reserves for a pittance.
He added that this economy was special. It was immune from the boom to bust cycle. In fact, every ignoramus except Brown knows that boom to bust is inseparable from the capitalist system itself.
He continued with his declaration that he stands not for the sectional interests of the trade unions but for the national interest. Again, every ignoramus knows that the national interest = the interests of the bankers and capitalists. Brown fooled nobody.
He has now coupled light touch regulation of industry and a record low level of taxation of the bosses and bankers, with draconian pay cuts, job cuts and privatisations for the working class. He has recast himself as a Thatcherite engaged in the same civil war with the working class as Thatcher was with the miners.
So, though the TUC may wish for an interest rate cut in the near future, it doesn’t look likely:
BANK HINTS AT RATE RISES TO COME
‘It is too soon to tell how far the disruption in financial markets will impair the availability of credit to companies and households,’ said the Bank of England (BofE) yesterday.
The Bank took the unprecedented step of issuing an immediate statement hinting at higher interest rates to come, with its decision to keep interest rates on hold for the next month.
The statement said: ‘The Bank of England’s Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 5.75 per cent.
‘In its August Inflation Report, the Committee’s central projection was for inflation to remain close to the 2 per cent target over the forecast period and for output growth to ease, reflecting a slowing in both consumer spending and business investment.
‘In recent weeks, heightened concerns about a variety of asset-backed securities have led to disruption around the world, not only in markets for those financial instruments but also in money markets more generally.
‘The MPC’s mandate is to set interest rates to meet the government’s 2 per cent target for CPI inflation.
‘So the Committee discussed these developments and other economic data in terms of their implications for the outlook for inflation.
‘CPI inflation fell back to 1.9 per cent in July and may remain around, or a little below, the 2 per cent target for the next few months.
‘Pay pressures remain muted. There are tentative signs of a slowing in consumer spending.
‘But the recent solid pace of output growth has been sustained and the margin of spare capacity appears limited. Indicators of pricing pressure remain somewhat elevated.
‘It is too soon to tell how far the disruption in financial markets will impair the availability of credit to companies and households.
‘As stated in its August Report, the MPC is monitoring closely the evolution of both credit spreads and the quantities of credit extended, alongside all other data relevant to the outlook for inflation.
‘Against that background, the Committee judged that no change in Bank Rate was necessary at this meeting to keep inflation on track to meet the target in the medium term.’
The British Chambers of Commerce (BCC) criticised the rates decision.
BCC economic adviser David Kern said: ‘Simply keeping rates on hold today is not enough, if the decision is interpreted as a mere short-lived postponement.
‘The MPC must acknowledge that further interest rate increases should now be off the agenda, at least for the time being.’
The European Central Bank (ECB) yesterday afternoon also kept interest rates on hold at 4 per cent.
In a ‘quick tender’ that provided funds to commercial banks for one day, the ECB made 42.24 billion euros (57.4 billion dollars) available at a marginal, or lowest, rate of 4.06 per cent and a weighted average rate of 4.13 per cent, the bank said.
Four days earlier, the ECB had pumped a record amount of 94.8 billion euros into the markets.