Central Banks act on meltdown fear

Mid October 2007 when the central bank and governors and finance minsisters from the G7 countries met in Washington they thought the worse of the global credit crunch might be over, far from it we are now in mid December and the central banks have been forced to act. Yesterday around 2pm GMT The Bank of England, Federal Reserve, The European central bank, Bank of Canada and the Swiss central bank announced they were combining forces to release into respective economies $100bn. This release of money via auctions is to prevent the worsening credit crunch derailing the world economy. Put simply commercial banks are not lending to each other due to the losses from the sub-prime fall out, confidence has been sapped as banks are hoarding cash mainly to balance their books for the end of year. Libor and Interbank interest rates are at 17 year highs as continual losses are announced by banks. Just this week UBS announced a further $11bn writedown on loans and with others due to report Q4 results who knows what lurks around the corner.

Whilst the injection of cash from the Central banks are seen as a good thing we can't simply think this alone will fix the credit crunch. The following needs to happen:

Libor-The London Interbank Offered Rate needs to come down this is the rate that banks lend to each other and for the past three months it has been very high.

The billion-pound write downs by banks and their holdings of complex trading instruments coming to a halt. This will mean that the value of collateralised debt obligations (CDO's) which contain many of the sub prime mortgages in the US will have stabilised.

Debt markets starting to open up, with companies again able to turn to the financial markets to raise fresh money in the form of long-term debt and short term commercial paper.

Securitisations of the type which got Northern Rock into trouble once again emerging.

Just how the markets react over the coming days and weeks are crucial to this ploy by the Central banks working. Just late tonight the Libor rate has not reacted to the announcement by the Central banks but these are early days the Bank Of England's first auction is the 18th of December.

Normal services will only resume when these multi-billion losses diminish.

The threat of higher inflation is a concern but the Central banks really have to hope the credit crunch does not take hold as this will be a global problem with slower growth and recession.