Credit Crisis Prompts European Central Bank’s $586bn Cash Giveaway

The real capitalists were bargain hunting yesterday. That would explain yesterday’s methodical recovery by the ASX from the early session battering. “The hedge funds are taking the passion out of the trade by looking at the bigger issues out there and saying: ‘maybe when Centro (ASX:CNP) renegotiates its debt, there will be more credit available, so let’s not be so bearish about the stock now’,” David Irons of ABN AMRO told the Australian.

He may be right. There must be some stocks in the listed property trust sector that have decent assets and are not plagued by credit worries. We have no idea what they are because there even better opportunities elsewhere. But if hedge funds were buying Centro shares yesterday, it illustrates the point that the best time to be a buyer is when everyone else is selling. That’s when you get assets on sale.

Of course it helps to have real capital on hand for such fire sales. And we’re not so sure that counting on improving conditions in the credit market is a good strategy, short-term or long-term. Things seem to be going from bad to worse.

How bad and how much worse? The European Central Bank is giving away cash for the next two weeks. It reminds us of a famous headline from a spruiker in the States selling a book on how to obtain government giveaways. “Free money to change your life!” Who doesn’t want free money?

Specifically, the ECB has made some US$586 billion in funds available for banks at the below-market rate of just 4.21%. Act now
while supplies last!

It is not uncommon for central banks to print a whole mountain of cash at the end of the year. The demand for cash increases at the end of the calendar year as financial institutions square their accounts. Plus, it’s nice to have a little extra in the pocket these days, when credit is generally tight.

But $586 billion? Is that normal? The Fed is engaged in similar operations, but on a much smaller scale. The ECB action, though, has already produced results. “The two-week euro interbank offered rate dropped a record 50 basis points to 4.45 percent,” reports Bloomberg. “The rate had climbed 83 basis points in the past two weeks as banks anticipated a squeeze on credit through the end of the year.”

Dan Denning
Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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Gee, since they’re giving it out for free, I wouldn’t mind a bagfull or two for Christmas myself Where do I sign? :-)

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