A nostalgic metaphor has entered the anxious conversations about the health of the global banking system. We’re told it’s like the Y2K problem. Let’s hope so.
As New Year’s Eve 1999 approached, fear spread around the world that the mother of all computer glitches, concerning the change from 1999 to 2000 in computer clocks, would derail the civilized world.
All sorts of preparations were made, from reprogramming software to issuing flashlights and bottled water. In the end, nothing happened, either because of the preparations or in spite of them.
This time, the normal slowdown in world cash liquidity, as people go on holiday vacations and businesses and financial institutions close their books for year-end reports, is being exacerbated by credit market turmoil.
A key indicator, short-term interest rates set in London under major currencies and called Libor, or London interbank offered rates, has been rising despite the Federal Reserve’s interest rate cuts in September and October. Banks are hoarding cash. They need capital to back bad loans on their balance sheets and help customers who have lost a source of borrowing in the commercial paper market, which has dried up.
“I think the analogy to Y2K is apt,” said Joseph Trevisani, chief market analyst for FX Solutions. “At the end of the year, the markets wind down. There’s less liquidity. Without liquidity, you’re going to drive the markets to levels that people will start to freak out.”
“The year-end credit crunch is quite severe,” said Andrew Busch, foreign-exchange strategist for BMO Capital Markets.
With private banks keeping their doors shut, the spotlight has turned to central banks, such as the Federal Reserve, which control national money supplies.
In a move that surprised many analysts, the Bank of Canada on Tuesday cut its target rate to 4.25 percent from 4.50 percent. The cut sent the Canadian dollar lower against the U.S. dollar, despite the robust Canadian economy. The dollar fell against other currencies.
Michael Woolfolk, senior currency strategist at the Bank of New York Mellon, said Canadian authorities want to avoid a sustained misalignment between the U.S. and Canadian dollars. But he added that central banks appear to be acting in concert to ease a global liquidity crisis.
“I do believe there is coordination going on,” he said. “I think it opens the door for rate cuts in Europe, if need be.”
The Bank of England and the European Central Bank are to meet Thursday. Late Tuesday, the Reserve Bank of Australia held its short-term rate at 6.75 percent. Australia, which is fighting inflation, raised rates in August and November.
In an unexpected move that highlighted the focus on central banking, the Australian central bank said it would join its peers in issuing statements after each interest-rate policy meeting. Previously, the bank had issued a statement only when its changed its interest rate target.
Greg Anderson, director of foreign exchange strategy at ABN Amro Bank, said central banks of major countries will find their own ways to address the reluctance of private banks to lend.
All the major banks “are short on cash,” Anderson said. Central banks across the globe “will make individual decisions” to respond to the problem, he said.
Remember that Y2K was forgotten quickly.
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