Thirsty Rock

Central banks across the world have pumped billions of dollars into money markets to limit the damage inflicted by the subprime mortgage woes. To date more than USD 300 billion has poured in from central banks in Asia, Europe and the US. By contrast Mervyn King, Bank of England Governor, has sat back, relaxed and watched the markets panic. How come? A year or so ago the BoE set a threshold at which it may intervene in a credit crisis. In a nutshell, unlimited funds are available to those banks prepared to pay one percent (100 bp) above a target rate set by the BoE. The current target rate is 5.75%. Since the start of the current market turmoil, overnight interbank rates in the UK have peaked around 6.5% or 75 bp above the target rate. The banks have not gone bowl in hand to the BoE. For good reason. The more illiquid the markets get, the higher the rates bank charge each other. However as soon as the rates breach 6.75%, limitless funds are immediately available to the big banks

Heads of state of the Southern African Development Community (SADC) meet next week in the Zambian capital, Lusaka. SADC is a group of countries whose leaders meet every so often to discuss what went wrong since the last time they met. A lot has gone wrong in Zimbabwe. The Zimbabwean economy is in tatters, held together by Band-Aid and Scotch Tape. Pump readings at fuel stations are unable to keep up with inflation. While the SADC meeting may offer a sympathetic ear to President Robert Mugabe, attempting to fix his economy is akin to picking nickels in front of a steam roller. That said, the economic fortunes of the other members of the group have been good. Economic growth is at its best in years with GDP averaging 5% over the last five years. Triple digit inflation no longer haunts governments. Commodity prices have soared, with copper taking the lead. Interest rates are down along with the cost of borrowing. Despite the drought in South Africa, corn (a regional staple) is in abund

In an attempt to settle investor nerves the European Central Bank injected some USD 131 billion into the European money markets. The Federal Reserve Bank chipped in with USD 24 billion followed by the Bank of Japan which pumped USD 8.5 billion into the Japanese financial system. According to the BBC the Australian central bank also moved to calm their market. As with any fall, the further down the markets go the faster the descent. What triggered the current mayhem in the markets? When did markets tip over? In my opinion the wheels came off shortly after the two hedge funds set up by Bear Stearns took a knock from investments in collaterized debt obligations (CDOs). Thereafter ailing funds have stepped forward, one after another, to announce fantastic losses. IKF, the German lender, and more recently BNP Paribas (a huge French bank) added further momentum to the flight of investors away from risky assets. It is interesting that the Fed injected funds into the markets on t

On Sunday 29 July 2007 the German government reportedly intervened in what some consider the worst banking crisis since 1931. IKF, a bank based in Düsseldorf, is on the skids thanks to the havoc wreaked by subprime mortgages. Jochen Sanio, head of financial regulation, is reported to have called senior banking executives to help plot a strategy to bail out IKF. Only a few months ago many believed the subprime lending problems afflicting the US to be noncontagious. However last week saw stock markets tumble on both sides of the Atlantic with investors fleeing from risky assets and seeking refuge in assets such as US treasuries. While some lenders writhe in agony, Deutsche Bank is laughing all the way to the bank. Deutsche bet on a credit crunch two years ago and their results published Wednesday show a massive increase in earnings thanks in part to the subprime upheaval.