Japan, Australia Add $113 Billion to Boost Confidence

By Shamim Adam and Nate Hosoda
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Sept. 19 (Bloomberg) -- Central banks in Japan and Australia pumped some $113 billion into money markets this week, holding down borrowing costs to revive confidence among banks.

The Bank of Japan pumped 2 trillion yen ($19 billion) today, for a total of 10 trillion yen this week, the biggest since at least the start of 2007. The Reserve Bank of Australia added A$1 billion ($824 million) and has injected more than A$12 billion this week, the most in almost 13 months.

``Funding pressures globally have intensified following the turmoil and fear that we could be in for another bout of asset price depreciations,'' said Adam Carr, a senior economist in Sydney at ICAP Australia Ltd., part of the world's largest inter-bank broker. ``Financial institutions are hoarding cash and shoring up their balance sheets.''

Central banks injected more than $220 billion globally this week as credit markets seized up after the failure of Lehman Brothers Holdings Inc. and the U.S. government takeover of American International Group. The cost to protect against defaults on Asia-Pacific bonds fell by the most in more than five months and Japanese and Australian funding costs were unchanged.

U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke said they are working on a plan requiring legislation aimed at alleviating market turmoil.

The two regulators are seeking support for a plan to help financial institutions remove from their balance sheets illiquid mortgage-related assets at the root of the credit crisis.

Borrowing Costs Drop

Hong Kong's interbank loan rates declined from the highest in 11 months after the Hong Kong Monetary Authority injected HK$1.556 billion ($200 million) yesterday. The one-month Hong Kong interbank offered rate fell to 3.69 percent from 4.83 percent yesterday when it more than doubled.

The Fed yesterday agreed swap facilities with five other central banks that will increase the amount of U.S. currency available overseas by $180 billion to $247 billion. It doubled the limit of dollars it will provide the European Central Bank and Swiss National Bank to $137 billion, and authorized $110 billion of swap facilities with Japan, the U.K. and Canada.

The cost of borrowing in dollars overnight tumbled after the coordinated action was announced. The London interbank offered rate, or Libor, for overnight loans fell 1.19 percentage points to 3.84 percent yesterday.

Swap Dollars

The Bank of Japan said it will use its $60 billion swap arrangement to supply dollars to local and foreign financial institutions as required by market conditions. It will choose participants tomorrow.

``They will keep liquidity in the system because their goal is to revive the short-term liquidity in the dollar, which is the oil in the global financial system,'' said Sebastien Barbe, a Hong Kong-based strategist at Calyon, the investment banking unit of France's Credit Agricole SA.

Japan's overnight loan rate fell to 0.4 percent after the BOJ's second injection today at 12:50 p.m. in Tokyo added another 1 trillion yen. The rate was as high as 0.585 percent before today's first injection of 2 trillion yen. The central bank's target overnight lending rate is 0.5 percent.

BOJ Governor Masaaki Shirakawa yesterday said the agreement with the Fed is aimed at providing dollars to foreign banks and brokerages. The Bank of Japan ``doesn't have any particular concern'' about Japanese financial institutions' borrowing of dollars, Shirakawa said.

Foreign banks are paying more than Japanese banks to borrow cash because counterparties are less willing to lend to them. Japanese banks borrowed overnight funds at interest rates between 0.4 percent and 0.5 percent today, while foreign banks had to pay between 0.6 percent and 0.7 percent, according to Tokyo Tanshi, a Japanese money market brokerage.

Australia Banks

Australian banks' borrowing costs were stable today, according to a gauge that measures the availability of funds in the market. The difference between the rate banks charge each other for one-month loans and the overnight indexed swap rate was unchanged at 50.5 basis points at 2:12 p.m. in Sydney, after widening 13.5 points yesterday in the biggest jump since July 24, Bloomberg data show. The average spread for the past year was 23 basis points.

New Zealand's central bank will accept bank bills in its daily market operations to ease pressure on liquidity in the financial system.

The difference between the rate New Zealand banks charge each other for one-month loans and the overnight indexed swap rate widened to 59 basis points at 4:21 p.m. in Wellington, from 53.5 points yesterday, Bloomberg data show.

Default protection costs for bonds from Australia and Asia outside Japan declined, according to traders of credit-default swaps.

The Markit iTraxx Australia index fell 34 basis points to 171 as of 1:11 p.m. in Sydney, Citigroup Inc. prices show. The benchmark, tied to the debt of 25 companies including Qantas Airways Ltd. and BHP Billiton Ltd., declines as perceptions of credit quality improve. Japan's benchmark of credit risk stood at 150, down from 175, according to Credit Suisse Group data.

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net Nate Hosoda in Tokyo at nhosoda@bloomberg.net