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ALEX BRUMMER: Beware the credit crunch

by Genia Popp (2020-04-13)

Andrew Bailey's first day as governor of the Bank of England saw a promise of 'prompt action' to deal with the financial fallout from the Covid-19 crisis. 

His pledge is a fresh signal that all is not well with the global monetary plumbing. The American central bank, the Federal Reserve, has intervened twice since last Thursday to try to ease the blind panic. 

First came an injection of a $1trillion of support to the money markets where banks lend to each other. 

The rush of bankers, companies and individual investors to buy protection by swapping equity holdings for cash and more secure assets, such as US Treasuries, is risking a credit crunch

Then on Sunday afternoon, the second shoe dropped with a swift cut in the key federal funds rate to zero, the promise of another $700billion of cash injections and the activation of swap lines with the Bank of England and other central banks with the aim of lowering the cost of dollar borrowing to non-US companies. 

The simple explanation of these actions is that share markets are in trauma and the Fed is seeking to turn the tide. Financial history shows that interest rates cuts do over time boost stock market indexes. 





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