Markets are unconvinced crisis is over

Dec 14 2007 by Iain Laing, The Journal

UK blue chips were sent into a tailspin yesterday as doubts mounted over the move by central banks to combat the credit crisis.

The FTSE 100 Index dropped by more than 2% after the initial cheer surrounding the co-ordinated global effort faded, with investors fearing the measures will not be enough.

Banks were the hardest hit as further losses relating to the credit crunch and collapse of the US sub-prime mortgage market were revealed on both sides of the Atlantic.

UK high street bank HBOS disclosed a £180m hit from the credit squeeze and fuelled concerns over pressure on margins from the tightening squeeze in money markets.

And in the US, three major banks including Wachovia and Bank of America, warned that losses from investments contaminated by US sub-prime mortgages will get worse.

The bad news left markets unconvinced that the steps taken by the Bank of England and its fellow central banks would prevent the crisis from deepening, despite praise for the plans from Prime Minister Gordon Brown.

Stocks had risen sharply immediately after the joint announcement was made yesterday, with the Footsie staging a 140-point turnaround to end the day up 23 points.

The main interbank lending rate – three-month Libor – also reacted positively, easing back to 6.51% at close yesterday. Libor had increased sharply in recent days, back up towards the levels seen at the height of the summer credit market meltdown. However, anxious investors were quick to question the effects of the central banks’ joint effort, said Victoria Savage from CMC Markets.

In America, the Dow Jones Industrial Average closed just 40 points higher yesterday, having soared more than 270 points at one stage, and was in the red again yesterday. “Equities are once again under pressure today as optimism wanes and liquidity fears reassert themselves,” she said.

HBOS was among the top share fallers on the London market today, falling 7%, with Barclays losing 5% and NatWest parent Royal Bank of Scotland falling 4%.

The losses erased any gains seen yesterday after central banks in Europe and the US announced that they would pump additional reserves into their respective systems.

The Bank of England said it was a measure to “address the elevated pressures in short-term funding markets” amid concerns that banks will hoard cash as they seek to balance their books for the year end, causing a New Year credit freeze.

The Bank will up the amount of money auctioned on December 18 and January 15 from £2.85bn to £11.35bn and said it would look at whether further measures were necessary after January “in light of market conditions at the time”. The move comes less than two weeks after the Bank announced £10bn in extra funding as governor Mervyn King raised the alarm over a possible year-end worsening in the credit crisis.