The credit crunch shows no signs of releasing its ever-tightening grip on world financial markets, and the Bank of England is being forced into further measures to try to tackle the crisis.
Only last week the Bank of England, the US Federal Reserve, the European Central Bank, plus the Bank of Canada and the Swiss National Bank revealed a plan agreed behind closed doors to boost finances in the wholesale money markets to ease an anticipated freeze in the New Year. They all announced that as part of a co-ordinated plan, they would inject additional reserves into the financial systems in their own countries to help release much needed credit.
As part of that plan the US Federal Reserve has made £20bn (about £9.9bn) available as one-month loans. The banks taking part in the scheme were not named.
The amount the Bank of England is releasing has been increased from last week’s £2.85bn to a new figure of £11.35bn, and £10bn of this will be offered for a three-month period. For those funds with three-month term, the Bank will accept a wider range of high-quality securities as collateral.
The Bank will repeat the process on 15 January 2008 at which point it will decide whether further measures are necessary in regard to the state of the market at that time.
Last week’s statement from the Bank of England said that such moves were a measure to ‘address the elevated pressures in short-term funding markets’. Libor - the London interbank lending rate - has gone up in recent weeks, but came down slightly as a result of last week’s announcement.
The problems with lack of cash in the markets has meant that the Mergers and Acquisitions business is on its knees, and this is usually the blood running through the veins of investment banking. Interest rates for Leveraged Buy-Outs have more than doubled since June to their highest level for four years. It is strangling the mergers business, and the number of takeovers has fallen by over 30% in the last five months. Such corporate activity has been a major factor in the rise in share prices from 2003 to mid-2007
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