The European Central Bank says it is willing to make unlimited short term loans of cash to the money markets. It is an unprecedented move designed to ease the credit squeeze that has cut off the lending from commercial banks which drives business.
The main reason that banks do not want to lend to each other is the meltdown of the US sub-prime mortgage market. High risk home loans made to people with poor credit histories led to record levels of foreclosures. That market has grown from less than 200 billion dollars in 2002 to 700 billion last year.
Many of the loans had been repackaged as so called investment vehicles and sold on to banks which lost money.
The Bank of England is part of the funding plan, but its governor, Mervyn King, said it may not be enough to stop a big slowdown in the world economy. He blamed the problems on investors' greed and ignorance. King said: "A painful adjustment faces the global banking sector over the next few months as losses are revealed and new capital is raised to repair bank balance sheets."
He pointed out that the problem with markets was not a lack of money but a lack of trust. The big banks, he said, are awash with cash, but what is lacking is the confidence to lend that money to other banks.
http://www.euronews.net |
