Markets demand US action.

news retrieve from Emerging Markets - Dated 13th October 2008

The US must match the sweeping financial system rescue measures announced yesterday by European leaders and by other countries, and move immediately to unfreeze global credit markets by guaranteeing interbank lending, financial industry leaders said yesterday.

Leaders of the 15 eurozone countries, at their emergency gathering in Paris, agreed on a package of measures to prevent systemically important banks from failing and to unfreeze credit markets in a bid to halt panic.

The moves, which will be detailed today by European authorities, were matched by similar initiatives yesterday in Norway, Portugal, Australia and New Zealand as well as by Gulf states.

In Washington, financiers gathered at the IMF/World Bank meetings greeted the measures, and said the US must follow suit.

Billionaire investor George Soros told Emerging Markets the European plan is “real”, and expressed confidence that the US would follow suit. “It will work”, he told a press briefing at the IMF in Washington. “We will have similar measures in the US. Libor should return close to the Fed fund rates. That will be a significant improvement.”

Richard Fisher, president and CEO of Reserve Bank of Dallas, pledged that members of the US Federal Reserve system would “do whatever we have to do to provide a credible backstop for the credit system. Wecan and will restore order to the credit markets, but we can not undo in short order the damage to confidence.”

Markets welcomed the plan. As Emerging Markets went to press, Sydney’s and Seoul’s indexes leapt 4.5% and 2.7% respectively in early trading.

At the same time, the UK finalized its plans for injecting new capital into banks, announced earlier. Prime minister Gordon Brown said: “We will see over the coming few days worldwide action that will make people see that confidence in the banking system can be restored.”

The Paris meeting was called by French president Nicolas Sarkozy following last Friday’s G7 finance ministers’ meeting in Washington, that has been criticised for failing to offer concrete and collective solutions to the financial crisis.

Sarkozy said after the Paris meeting that a series of coordinated announcements of financial details could be expected today from leading European capitals.

According to a eurozone joint statement, leaders pledged to help or subscribe to debt-raising by banks for periods of up to five years. This should take the pressure off the blocked interbank market and also off bank balance sheets.

Germany alone is expected to unveil a rescue package for its banks worth around 400 billion euros, an official in Chancellor Angela Merkel’s conservative party said yesterday.

Financial industry leaders gathered in Washington had throughout the day been repeatedly calling for leading nations of the world to show “leadership”.

Citigroup senior vice chairman Bill Rhodes told a meeting of the Institute of International Finance, of which he is first vice chairman: “Policy makers need to get out in front. Resolving the crisis will require strong leadership and making difficult decisions.”

Deutsche Bank chief executive Josef Ackermann said: “The market is stalled now and so public policy actions to restore the market are essential,” he said, adding that “a systemic crisis needs systemic responses.”

AIG vice-chairman Jacob Frenkel told Emerging Markets that markets had interpreted the lack of concreteness in the G7 finance ministers’ statement “as a signs of lack of agreement” which served only to further undermine confidence. “What the markets are now looking for is something that is more concrete than the general statements of intent,” he said.

“We must see further initiatives within the next 24 hours and they must be coherent and concrete,” he said. “Markets are the gauge” and they are providing “a daily referendum” on policy-makers actions, Frenkel added.