ECB Hopes Second Cash Injection Will Cure Credit Woes | Business| Economy and finance news from a German perspective | DW | 16.09.2008
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ECB Hopes Second Cash Injection Will Cure Credit Woes

The European Central Bank again allotted billions of euros to keep banks lending to one another. But questions continue about the depth of the financial crisis and the best solution.

Symbolic picture of needle injecting euros

Europe's banking system has gotten a big, big jab

The ECB in Frankfurt on Tuesday, Sept. 16, said it was more than tripling the amount of liquidity assistance available to financial institutions, adding 70 billion euros ($99.6 billion) to the 30 billion euros promised the day before.

The massive injection was an effort to head off further bank insolvencies and damage to stock market share prices caused by the credit crunch that has arisen from the subprime mortgage lending crisis.

With doomsayers warning that the crunch could wreak havoc further upon the global economy, many of the world's central banks were taking action similar to the ECB's. State reserve banks in Japan, England and Switzerland also said they were making large amounts of credit available to financial markets.

Steinbrueck speaking to parliament

Steinbrueck had some gloomy news for Germany's parliament

"It's clear that this financial market crisis is the worst worldwide in decades, and it is not over," German Finance Minister Peer Steinbrueck told Germany's parliament about the ECB's action.

Although the crisis was the worst in decades, there would be no "domino effects" in Europe and no widespread bank failures, Steinbrueck said.

The injections come the day after American investment bank Lehman Brothers announced it was filing for Chapter 11 bankruptcy, making it the largest firm in history to go under. Almost at the same time, US financial giant Merrill Lynch sold itself off to Bank of America to avoid insolvency.

The New York stock exchange lost 500 points on Monday -- the biggest one-day drop since the immediate aftermath of the 9/11 terrorist attacks. The financial interventions are aimed at encouraging banks to lend one another money so as to avoid further such bankruptcies.

DAX unimpressed

Brokers speaks on telephone

Tuesday was another depressing day on the DAX

But if the ECB's massive shot in the arm was intended to reassure investors, the German Stock Exchange in Frankfurt proved immune to the inoculation.

The DAX fell by 1.6 percent on Tuesday, as investors continued fret about the credit crisis and reacted to the news that quarterly profits at major American investment bank Goldman Sachs were down 71 percent.

And the dark clouds were by no means hovering over Frankfurt alone.

Japan's Nikkei index fell by almost 5 percent, while Britain's FTSE 100 and France CAC 40 were down by 3.4 percent and 1.9 percent respectively.

AIG corporate logo

The American International Group (AIG) could also be in trouble

The possibility of more bad news also loomed large, as reports swirled that American insurer AIG could be the next colossus heading for insolvency.

"We are heading for an unprecedented financial crisis," the head of the International Monetary Fund Dominique Strauss-Kahn told AFP news agency, explaining that the credit crunch stemmed from the "heart," not the margins of the US financial system.

"The slowdown is general," he added. "The entire global economy will slow down by between a half and 2 percent."

Silver linings?

Dominique Strauss-Kahn

Strauss-Kahn said bankers shouldn't leap from their office windows just yet

But Strauss-Kahn added that doom was not nigh and that next year could see a change of fortune.

"The current turbulence adds to the uncertainty, but we still predict an upturn in 2009," he said. "The economy is much more resilient than we had anticipated."

Surveys of German investor confidence are optimistic, with investors -- even after the Lehmann bankruptcy -- responding more positively to questions, according to the Center for European Economic Research in Mannheim.

"On the one hand, the ongoing decline of the oil price eases the burden on consumers and firms," said the center in a report released Tuesday. "On the other hand, the tendency of the euro in the past weeks to depreciate against the US dollar benefits German exporters."

In the US, the Federal Reserve held its base lending rate at 2.0 percent. Many investors had hoped for a rate cut in light of the market crisis.

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