Asia's central banks move to calm nervous markets

Asia's central banks move to calm nervous markets

Asia's central banks took further steps on Monday to calm markets roiled by fears over a credit squeeze, with the Bank of Japan injecting $5.1 billion into the banking system and others pledging to follow suit if needed.

South Korea's finance ministry said it was ready to supply emergency funds if credit dried up due to the turmoil in U.S. subprime mortgages. The country's banks and insurers have invested $850 million in the U.S. subprime mortgage loan sector, it added.

Malaysia's central bank said it was prepared to step in with funds to keep commercial banks lending to one another at normal rates, but added it had no specific plans to do so.

We're seeing more of the same. The central banks are trying to prop up confidence more than anything else, as markets are awaiting new information, said Robert Prior-Wandesforde, an economist at HSBC in Singapore.

Central bankers from Asia to the United States had managed to restore an uneasy calm to financial markets by injecting billions of dollars into money markets that had almost seized up.

The Asia-Pacific region is still awash in cash, with gross capital inflows into East Asia totaling $269 billion in 2006, the Asian Development Bank said.

Asia's stock markets were flat to higher on Monday, with Japan's Nikkei 225 index up 0.2 percent, and the yen was about unchanged.

There's no evidence of subprime-related problems in Asia yet. As far as stock markets are concerned, valuations in Europe and the United States are at 15-year lows, definitely not stretched, while the fundamentals are sound, particularly in Asia, HSBC's Prior-Wandesforde said.

Investors' main worries are undisclosed losses resulting from toxic debt that could trigger the collapse of banks and funds. It is this concern that has prompted banks to hoard cash rather than lend it to each other in short-term trades as usual, making interbank lending expensive.

Australia's interbank market showed no signs of stress, with the Reserve Bank of Australia (RBA) injecting A$1.52 billion ($1.3 billion) as part of its daily money market operation on Monday, slightly less than average as there were still funds available from Friday's operation.

It's a welcome sign that Asian central banks are being proactive and coming out and conveying a message to the market that if something goes wrong, or if there is some perceived tightness because people are not willing to extend liquidity, they will jump in, said Binay Chandgothia, chief investment officer for Principal Asset Management's Hong Kong operation.

Australia's central bank said there was a risk that a credit squeeze could crimp the U.S. economy and drag on the world outlook, but rated it as a low danger.

At this stage, the evidence continues to point to strong growth in the global economy overall, RBA Governor Glenn Stevens said in the bank's quarterly statement.

The widening in credit spreads so far has only seen them rise back to more reasonable levels after a period when risk appears to have been under-priced, he added.

The Bank of Japan's move to offer 600 billion yen ($5.1 billion) of funds to the banking system in a one-week operation on Monday comes after it supplied 1 trillion yen in overnight funds on Friday.

We are supplying the funds for a week to settle next Monday as we see a slight upward pressure on rates beyond the overnight call rate, a Bank of Japan official told Reuters, adding that it was part of its regular tenders.

Malaysia's central bank chief, Zeti Akhtar, predicted on Monday that markets would remain fickle but that Asia was stable amid high liquidity.

Monday's reassuring statements come after a week of panic in global markets over investors' exposure to complex credit derivatives linked to defaulting U.S. mortgages.

Over the weekend, Deutsche Postbank, Germany's biggest retail bank, was the latest big financial institution drawn into the subprime morass when it unveiled 600 million euros ($822 million) in exposure to two investment vehicles run by hard-hit German bank IKB.

Central bankers in Europe held talks with bank supervisors and financial executives to assess the dangers from risky U.S. mortgage debt to the financial system, industry sources said.

(Additional reporting by Wayne Cole in Sydney)