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Last Updated: Thursday, 13 December 2007, 09:39 GMT
UK welcomes world cash injection
US homes
Weakness in sub-prime loans have destabilised the financial sector
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.

There should be more focus on such co-operation, Mr Brown told a UK paper.

Analysts question if the unprecedented move will restore confidence and stave off recession.

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.

Such a co-operative act is a first, says BBC business editor Robert Peston.

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

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 newspaper the moves were "the co-operative effort I've wanted to see for some time".

He added: "It signals an international desire to act in what has been a period of global financial turbulence."

Scepticism

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.

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.

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.

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.

The declared losses and the suspicion of further losses lurking on banks' balance sheets have made banks reluctant to lend to each other.

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.

Customers queuing outside Northern Rock in September
Some banks are worried about the stigma attached to such auctions

Crucially, the central banks' move has removed the stigma attached to asking them for loans, said BBC business editor Robert Peston.

"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.

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.

"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.

Lower rates

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.

It is not yet clear whether the central banks' new plan will result in lower money market rates.

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.



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