Monday Outlook: European Central Banks Step Up

Libor set this morning (three month) at 4.75 percent. On Friday it had set at 4.82 percent.

Central banks in another coordinated effort have agreed to provide unlimited amounts of dollars (against the appropriate collateral) to the markets. This is via the Swiss National Bank, the Bank of England and the ECB. (Thank you to reader Milton Arbogast who mentioned that in a comment on a previous post.)

Her Majesty’s government has responded to the crisis of confidence in the banking system with an infusion of 37 billion pounds. The government has forced some banks to suspend paying dividends on stock. The government will take seats on the boards of some companies. The FT reports that it is possible that the government could own 60 percent of Royal Bank Scotland and 43.5 percent of the Lloyds HBOS entity.

Press reports indicate that the German government will announce a bailout package of 470 billion Euros later in the morning. The German proposal will guarantee lending between banks. Details of French and Italian proposals are expected later this morning. This FT story is a good summary of various proposals and actions by governments and central banks around the globe.

The U.S. government, according to the New York Times, has assured Mitsubishi that its $9 billion investment in Morgan Stanley will be “protected.” The writer at the Times rightly describes the move as “extraordinary."

The markets await details of proposals on recapitalization of the U.S. banking system.

Update: I noted that the German government rescue plan which includes guarantees and capital injections totaled 470 billion euros.

I hope that someone can point out a flaw in my logic but that would equate to about $2.7 trillion if one compares the relative GDP size of the U.S. and Germany. In dollars the 470 billion Euros is $635 billion.  The U.S. GDP is about 4.3 times that of the German GDP. Do the simple extension of 4.3 times $635 billion and you get something in the neighborhood of $2.7 trillion.

There are no words to describe that sum. I dare say that it would be impossible to raise that sum in timely fashion without a total disruption of capital market flows.