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Asian stocks markets open to calm Asian markets see shares recover
(about 3 hours later)
Asian stock markets saw modest rallies after central banks around the world pumped money into banking systems to ease fears of a global credit crisis.Asian stock markets saw modest rallies after central banks around the world pumped money into banking systems to ease fears of a global credit crisis.
The Bank of Japan announced another cash injection of 600bn yen (US$5bn, £2.5bn) into money markets, its second intervention in two trading days.The Bank of Japan announced another cash injection of 600bn yen (US$5bn, £2.5bn) into money markets, its second intervention in two trading days.
Its move is the latest by top central banks to prevent a credit crunch. Japan's main Nikkei index closed up 36 points at 16,800.
Shares slumped worldwide after a rise in US mortgage defaults triggered fears of a wider financial crisis. Global shares slumped last week after a rise in US mortgage defaults triggered fears of a wider financial crisis.
The move came after several banks froze or closed high-risk funds recently, causing fears over a credit crunch. Sub-prime woes
According to the Sunday Times, US analysts estimate that some $300bn (£148bn) in loans could be "at risk". If there is one thing that the markets hate, it is uncertainty Gilles Moec, Bank of America class="" href="/1/hi/business/5144662.stm">Q&A: Sub-prime lending
Specifically it is sub-prime loans that have been the worry. Sub-prime loans are those made to high-risk individuals and were promoted during a US housing boom. Last week's worldwide share falls came after several banks recently froze or closed high-risk investment funds, causing fears over a credit crunch.
But since then the housing market has slowed, and successive US interest rate rises have pushed up the cost of mortgage repayments, thereby increasing the number of defaults. According to some estimates, about $300bn (£148bn) in loans could be "at risk".
Uncertainty The problems were triggered by worries over sub-prime loans in the US. Sub-prime loans are those made to high-risk individuals and were promoted during the US housing boom.
If there is one thing that the markets hate, it is uncertainty Gilles Moec, senior economist at Bank of America class="" href="/1/hi/business/5144662.stm">Q&A: Sub-prime lending One of the biggest worries for investors has been not knowing the scale of the problem. However, successive US interest rate rises have pushed up the cost of mortgage repayments, thereby increasing the number of defaults.
"The big question is what is the overall amount and this is bad for the markets because if there is one thing that the markets hate, it is uncertainty," said Gilles Moec, senior economist at Bank of America. One of the biggest worries for investors has been not knowing the scale of the problem.
"The big question is what is the overall amount [of loans at risk], and this is bad for the markets because if there is one thing that the markets hate, it is uncertainty," said Gilles Moec, senior economist at Bank of America.
Over the weekend several banks started to put a figure on the amount of bad debt they own, including German state bank WestLB which said it had 1.25bn euros in total exposure to the US sub-prime sector.Over the weekend several banks started to put a figure on the amount of bad debt they own, including German state bank WestLB which said it had 1.25bn euros in total exposure to the US sub-prime sector.
InterventionIntervention
Before the recent volatility, several banks had suspended or closed funds that had invested heavily in the sub-prime sector.Before the recent volatility, several banks had suspended or closed funds that had invested heavily in the sub-prime sector.
It was a move by BNP Paribas on Thursday that was the start of the latest share slump. BNP Paribas sparked the latest share slump on Thursday when it closed three funds. The French bank said uncertainty in the sub-prime sector meant it could not assess the value of the funds accurately.
The French bank closed three funds, because it said uncertainty in the sub-prime sector meant it could not assess the value of the funds accurately.
With fears over liquidity increasing, several central banks then intervened by injecting money into the banking sector.With fears over liquidity increasing, several central banks then intervened by injecting money into the banking sector.
The European Central Bank (ECB) was the first to make the move - injecting 95bn euros on Thursday, before injecting another 61bn euros a day later.The European Central Bank (ECB) was the first to make the move - injecting 95bn euros on Thursday, before injecting another 61bn euros a day later.
Japan's central bank injected one trillion yen ($8.5bn; £4.2bn) into the financial system while the US Federal Reserve intervened twice on Friday, pumping $38bn into the banking system. Japan's central bank then injected an initial one trillion yen into the financial system, while the US Federal Reserve intervened twice on Friday, pumping $38bn into the banking system.
But while some said it made sense, other feared it only aggravated fears. But while some said it made sense, other feared it only made markets more nervous.
"The ECB was correct to shore up banks balance sheets by providing more liquidity," said Peter Morici, professor at the University of Maryland School of Business."The ECB was correct to shore up banks balance sheets by providing more liquidity," said Peter Morici, professor at the University of Maryland School of Business.
"But its high-profile tender offer did more to scare markets than calm them.""But its high-profile tender offer did more to scare markets than calm them."
Outlook
The prospect of further deterioration in US housing have altered the outlook for monetary policy in the US Citigroup briefing The recent turmoil has prompted analysts to ask whether it could have a wider impact on US economic growth, and therefore whether the Federal Reserve might think about cutting interest rates.
"The broadening storm in financial markets and the prospect of further deterioration in US housing have altered the outlook for monetary policy in the US, and possibly elsewhere," Citigroup wrote in a briefing note to clients.
Late on Friday, the International Monetary Fund made moves to allay fears over a wider melt-down.
"The fundamentals supporting strong global growth remain in place," it said.
By Friday's close the FTSE100 had seen its most dramatic loss in more than four years, shedding 3.7%.
The Paris-based Cac 40 was down 3.13% while the Dax in Frankfurt ended the week 1.48% lower.