Central banks launch $300 billion assault on credit crisis

NEW YORK (AFP) - Central banks threw more than 300 billion dollars at the global credit storm Thursday as pressure mounted on Wall Street legend Morgan Stanley and Swiss bank UBS.

The massive injection boosted battered US and European shares. Wall Street rose 1.27 percent in early trading.

The rescue of top British mortgage lender HBOS also helped but British Prime Minister Gordon Brown added to political calls for action, setting a priority to "ensure the stability of the (financial) system."

US President George W. Bush vowed his administration would confront the financial crisis however. "The American people can be sure we will continue to act to strengthen and stabilize our financial markets and improve investor confidence," Bush said at the White House.

The US Federal Reserve led the onslaught to relieve "elevated pressures" in strangled global markets by offering 180 billion dollars and promising more.

Central banks have now spent more than 600 billion dollars this week to avert a global system failure. In addition, the Fed rescued US insurance titan AIG with 85 billion dollars, having allowed Lehman Brothers bank to fail.



The Fed was joined by the European Central Bank with the British, Japanese, Swiss and Canadian banks in offering to swap currencies for dollars.

Figures from the central banks pointed to a total lifeline of 290 billion dollars on Thursday. The ECB also injected 25 billion euros (36 million dollars) directly and the Fed announced a similar cash stimulus and said it was ready to do more.

"For the time being, this (central bank action) has stabilised the financial system," said Andrew Busch at BMO Capital Markets.

The action shored up European stocks. London's FTSE 100 leading shares index gained 0.86 percent in late afternoon trade as HBOS shares rocketed 34.1 percent to 197.2 pence. This follows a 10-percent drop in three days.

Asian stocks ended with heavy falls on reports that Morgan Stanley, one of the last two independent US merchant banks, was in merger talks. Morgan Stanley's shares slumped 24 percent on Wednesday.

US reports said Morgan Stanley was seeking a merger with Wachovia Corporation or state controlled Chinese conglomerate CITIC. The Swiss market was alive with rumours that UBS, the country's biggest bank, might merge with Credit Suisse.

CITIC declined to comment on a report by CNBC television, quoting US and Chinese sources, that it was in talks with Morgan Stanley. The sovereign wealth fund, China Investment Corporation, already owns 9.9 percent of Morgan Stanley.

The New York Times said Morgan Stanley was in "preliminary" talks with Wachovia Corporation of the United States.

US thrift Washington Mutual is also at the centre of market worries.

In Zurich, UBS shares, which had crashed more than 70 percent on subprime losses, rallied 10 percent with a boost from "rumours circulating on a merger between UBS and Credit Suisse," a trader there told AFP.

Russian President Dmitry Medvedev ordered his government to support the Russian financial system, saying it was the "most important priority", after the stock market in Moscow was closed for a third day in a row.

"We have enough reserves, we have a strong economy," Medvedev said. "The market will get all necessary support."

The global panic drove money to the safety of US Treasury bonds and gold, with some T bond yields falling to the lowest level since 1954, sending the interest rate landscape haywire.

This contrasts with tension on interbank money markets, the heartbeat of the banking system which has slowed critically because banks are frightened of lending to each other.

Sucden brokerage analyst Nimit Khamar in London said the "critical" factor for "any normality in the markets" was whether central bank action would bring down interbank rates.

Short-term interbank rates sent conflicting signals in Europe. London's overnight Libor dollar rate eased sharply to 3.84 percent, but the eurozone one-week Euribor rate rose slightly to 4.557 percent.

The euro rose to a two week high of 1.45 against the dollar, and the oil price rallied for a second day, to 102 dollars, because the central bank move had "sparked some interest" in dollar-based assets, Khamar said.

British authorities oversaw the takeover of Halifax Bank of Scotland (HBOS) by Lloyds TSB in an all-share deal worth 12.2-billion-pounds (15.4 billion euros, 21 billion dollars).

Prime Minister Brown said the world had to "clean up the financial system, and he slammed "irresponsible" behaviour in the financial sector, after the HBOS rescue which Britain's financial regulator said would "enhance stability".