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Tue, Mar 03, 2009 - Page 10 News List

Stabilization policies ‘gaining traction’

RISKS The Bank for International Settlements warned, however, that these measures were also harming budget balances and putting pressure on the public debt market

AFP , GENEVA

Government measures aimed at stabilizing the financial markets appear to have had some positive effect between November and last month, the world’s largest central banking body said yesterday.

However, the impact of such massive state aid packages on budget balances is leading to intense pressure on the government debt market, the Bank for International Settlements (BIS) said in its BIS Quarterly Review.

“Policy measures aimed at stabilizing markets appeared to gain traction over the period,” it said.

Central bank action and guarantees offered by governments helped to curb volatility in interbank markets and boosted borrowing to record levels in January, when “numerous large corporate” bonds were issued.

“With a number of country authorities considering outright purchases of corporate bonds, and with guarantee programmes in place to support financial insurers, a long pipeline of pent-up issuance opened up in January,” the BIS said.

Bonds are essentially debt and can be issued by companies or countries that need funding.

Latest BIS statistics indicate that corporate borrowing jumped 150 percent to US$131 billion in January compared with the average levels during the same month in previous years.

The observation that measures are starting to have an effect appear to bear out the G10 group of central bankers’ assessment in January that these policies will “progressively play a positive role” in the recovery of the global economy.

Governments of several large Western economies, such as Britain and Germany, have unveiled plans to guarantee loans to help companies or banks obtain necessary funds amid a liquidity crunch.

Latest BIS statistics indicate that funding flows, which were blocked by a liquidity crunch in the third quarter, began to recover as early as the fourth quarter of last year.

The net amount of international bonds and notes or debt issued increased to US$624.3 billion, up almost 1.5 times that of the US$253.3 billion in the third quarter.

“The increase was well beyond normal seasonal patterns: The year-on-year rise over the fourth quarter of 2007 was 30 percent,” the BIS said.

Financial institutions recorded the largest jump, with issuances of bonds and notes rising to US$570 billion in the fourth quarter from US$252 billion in the third quarter.

The borrowing was supported by government guarantee schemes for bank bonds in Europe and in the US.

In particular, euro-denominated borrowing soared 10 times. Net issuance in euros spiked to US$337 billion in the fourth quarter from US$30 billion in the previous one.

While policies are easing funding, the massive state aid packages are harming budget balances and leading to pressure on the government debt market.

Governments are finding it “more challenging to raise money in bond markets.”

“Moreover, growing volumes of corporate issuance and government-guaranteed bank debt have meant that governments are facing increasing competition for investors,” the BIS said, adding that some eurozone countries have canceled debt auctions because of a lack of demand.

Even German bonds, which are viewed as one of the world’s safest assets, have failed to attract sufficient takers on several occasions.

Governments, such as the US, have been issuing bonds to fund stimulus plans or to trim their budget deficits.

The US, for instance, has been urging China, which holds US$696.2 billion in US Treasury bills — also the world’s largest amount, to keep buying US bonds.

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