-- US Fed launches new money market facility
-- France lends six top banks 10.5 billion euros
-- Pakistan needs $10-15 billion, Ukraine close to IMF deal
-- Japan signals broader bank bailout
Interbank lending costs came down again, offering tentative signs of renewed confidence in the financial system, as weeks of bailouts and rescue plans appear to have cooled the worst crisis since the 1930s Great Depression. Governments around the world have promised $3.3 trillion to guarantee bank deposits and bank-to-bank lending, and in many cases have taken stakes in struggling banks.
"The market is cautiously testing the water," said Meg Browne, senior currency strategist at Brown Brothers Harriman. "We've had some improvement from the degree of uncertainty and nervousness we had last week, but it may take more money from governments around the world before we return to normal."
But aversion to risk pret fell below market expectations. The Fed action was aimed at helping money market mutual funds meet their redemptions, or investor requests for the principal on a security. Funds had become anxious about their liquidity and were reluctant to lend.
"This is a very big event," Laurence Fink, chairman and CEO of BlackRock, told a conference call. "It will allow people like BlackRock and other money market funds to start extending our purchases of CP (commercial paper)."
In a previous attempt to spark lending, the Fed on October 7 agreed to buy commercial paper - the short-term debt companies use to fund day-to-day operations. The Fed also agreed on September 19 to lend to banks to fund purchases of asset-backed commercial paper from money markets.
The US dollar rallied to a year-and-a-half high against a basket of currencies on Tuesday as investors and companies continued to deleverage. The stronger dollar, in turn, sent gold and oil prices down nearly 4 percent. Japanese stocks closed 3.3 percent higher and European shares reversed earlier gains to close down 0.8 percent. The Dow was off more than 1.6 percent.
IMF TO THE RESCUE: The International Monetary Fund stood ready to help Pakistan, which said it needed up to $15 billion to avert a balance of payments crisis. Ukraine also said it was close to agreeing to measures to allow it to receive IMF aid. Iceland as well appeared close to a deal with the IMF. In the United States, the economy continued to dominate the presidential campaign two weeks before the November 4 vote. Democrat Barack Obama extended his lead over Republican John McCain in the polls while economic advisers to the candidates debated the impact of America's growing budget deficit.
France's banks won some respite from the ravages of the financial crisis through a 10.5 billion-euro ($13.9 billion) state cash injection, although analysts said the banks may yet need more help. However, Britain's economy moved a step closer to recession after more dismal data showed home sales halving and manufacturers preparing to cut jobs as their confidence sank to a 28-year low.
In Japan, Economics Minister Kaoru Yosano said the country's big banks could get public funds if needed, as the government considered recasting a law aimed mainly at regional banks to speed the flow of finance to credit-starved small firms.
There were some signs the global efforts were paying dividends. Interbank dollar, euro and sterling borrowing costs fell and spreads narrowed on Tuesday, giving further evidence that money markets - the arteries of the global financial system - continued to recover from the virtual paralysis following the demise of Lehman Brothers in mid-September. But the crisis is not likely to end until central bank and government support is removed and bank-to-bank lending - frozen for much of the last year by uncertainty over which groups faced financial disaster - is flowing freely again.