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UK welcomes world cash injection UK welcomes world cash injection
(about 3 hours later)
A joint plan by five central banks aimed at easing the credit crunch in financial markets has been welcomed by UK Prime Minister Gordon Brown.A joint plan by five central banks aimed at easing the credit crunch in financial markets has been welcomed by UK Prime Minister Gordon Brown.
Up to $110bn (£54bn) in loans will be made available to world money markets by central banks including the Bank of England and the US Federal Reserve.Up to $110bn (£54bn) in loans will be made available to world money markets by central banks including the Bank of England and the US Federal Reserve.
In an interview with the Times newspaper, Mr Brown said there should be more focus on such co-operation. There should be more focus on such co-operation, Mr Brown told a UK paper.
Analysts say the unprecedented move is a sign of the severity of the problems. Analysts question if the unprecedented move will restore confidence and stave off recession.
AuctionsAuctions
The Federal Reserve and the Bank of England will team up with the European Central Bank and central banks from Canada and Switzerland to offer the cash loans, to be made available in auctions.The Federal Reserve and the Bank of England will team up with the European Central Bank and central banks from Canada and Switzerland to offer the cash loans, to be made available in auctions.
Ideally, what we are looking for is the financial institutions to have written off their problems, built up confidence and be willing to lend to each other Peter DunayInvestment bank strategist Such a co-operative act is a first, says BBC business editor Robert Peston.
Such a co-operative act is a first, BBC business editor Robert Peston said. The core problem is we still don't know...exactly how bad the problem is that kicked this whole thing off, the sub-prime crisis Merryn Somerset Webb, editor, Money Week class="" href="http://news.bbc.co.uk/1/hi/business/7141430.stm">Rock suitor threatens ultimatum
Other analysts pointed out that the actions are on a greater scale than the moves taken by the Fed to shore up the economy after the 9/11 attacks on the US. The actions are on a greater scale than the moves taken by the Fed to shore up the economy after the 9/11 attacks on the US, indicating the severity of the current situation and how seriously central banks are taking it, analysts say.
Mr Brown, due in Lisbon for the signing of the new European reform treaty, told the Times the moves were "the co-operative effort I've wanted to see for some time. Mr Brown, due in Lisbon for the signing of the new European reform treaty, told the Times newspaper the moves were "the co-operative effort I've wanted to see for some time".
"It signals an international desire to act in what has been a period of global financial turbulence." He added: "It signals an international desire to act in what has been a period of global financial turbulence."
'Staving off recession' Scepticism
Share prices in the US rose sharply after the plan was announced on Wednesday, but have since dropped again. Analysts have welcomed the move, but question how far it will go to resolve the crisis in the financial sector, which has its roots in the US sub-prime loan market.
Five of the most powerful central banks are taking concerted action to stop a banking crisis turning into a recession, the BBC's Mark Gregory said. Banks who lent money to high-risk borrowers in the US have been hit hard in recent months as these borrowers, often with poor credit histories, struggled to meet their payments.
The problem is that commercial banks in rich nations have sustained huge losses on investments that have gone sour, he said Given that much of this debt had been repackaged and re-sold to investors around the world, the impact of the US mortgage defaults has been global.
This has made them reluctant to lend any more money, especially to each other. A string of banks have registered losses because of their exposure to investment products linked to sub-prime mortgages, with total declared losses linked to sub-prime debt about $60bn.
By acting together to pump extra funds into the system in the form of loans, the central banks hope to have a bigger impact. The declared losses and the suspicion of further losses lurking on banks' balance sheets have made banks reluctant to lend to each other.
But they are also putting their credibility on the line, our correspondent added. By acting together to pump extra funds into the system in the form of loans, the central banks hope to ease the crisis of liquidity.
If the plan fails, it is unclear what else they could do to restore confidence. Some banks are worried about the stigma attached to such auctions
Capital gap Crucially, the central banks' move has removed the stigma attached to asking them for loans, said BBC business editor Robert Peston.
Peter Dunay, chief strategist at investment bank Leeb Capital Management in New York, said the new money could only help, but there was a broader problem to consider. "Having seen the run on Northern Rock, they were terrified of being tarnished in the same way," he said on Radio 4's Today programme.
"Ideally, what we are looking for is the financial institutions to have written off their problems, built up confidence and be willing to lend to each other," he told the BBC's World Today programme. But given that it is still not clear how badly banks' balance sheets have been hit by the sub-prime crisis, it is not clear how much Wednesday's announcement will help, some said.
"Right now... they do not want to lend - they do not want to lend to the public, they do not want to lend to each other. "The core problem is we still don't know... exactly how bad the problem is that kicked this whole thing off, the sub-prime crisis," Merryn Somerset Webb, editor of Money Week, said on the Today programme.
"They don't have the capital, they're very concerned and they're holding a lot of debt that is still a problem for them." Lower rates
Robert Heller, a former Federal Reserve Board Governor, said US interest rates needed to come down if a recession was to be avoided. In the past week, the Federal Reserve and the Bank of England have cut interest rates, but this has yet to feed into money market rates, our business editor says.
He told the BBC's Today programme: "We've got to do something about it, because if you do nothing then certainly the situation will get worse. It is not yet clear whether the central banks' new plan will result in lower money market rates.
"As so often, if the United States catches a cold then Europe catches pneumonia." But if the plan fails, the chances of restoring economic confidence are slim.
While share prices in the US rose sharply after the plan was announced, they have since weakened. Fears remain that the crisis will result in a recession in the US and elsewhere.
"I think a serious recession is unlikely, a slower world economy is likely....a recession, no," Tim Congdon of Lombard Street Research told the Today programme.