Asia battles to shield markets from Wall Street crisis

Asian authorities poured more cash into money markets on Thursday and sprang to the defence of tumbling currencies, bonds and stocks to prevent upheaval on Wall Street from shattering regional confidence.
China relaxed policy for the second time this week, while Japan, Australia and India pumped a further $28 bln into money markets which nearly seized up after the collapse of Lehman Brothers and the nationalisation of U.S. insurer AIG.
South Korea sold dollars in the swap market and said it would try to halt the slide in bond prices, the Philippines intervened to support the peso, and Taiwan warned it could use a state fund to prop up stocks as markets whipsawed across the region facing it toughest test since the Asian financial crisis of 1997.
The Asian Development Bank urged the region's policymakers and regulators to get down to business now to shield the banks from the turmoil triggered by U.S. mortgage defaults that have inflicted more than $400 bln in losses and write-downs on Western lenders. Asian banks have largely escaped the worst of the losses from defaults on U.S. subprime home loans that have now escalated into Wall Street's worst crisis since the Great Depression and threaten to rupture the global financial system.
"Even if subprime-related losses have to date been lower than elsewhere, this is no guarantee recent events will not affect major Asian financial institutions," Haruhiko Kuroda, the president of the ADB said in Manila.
"We need to establish best practices for handling liquidity shortages or ensuring effective financial sector safety nets," Kuroda said.
Global stock markets plunged after U.S. government's $85 bln rescue of insurance giant American International Group failed to calm investors, now wondering which company will be the next victim of the 13-month old credit crisis.
Overnight, news emerged of takeovers involving No. 2 U.S. investment bank Morgan Stanley, top U.S. savings and loan Washington Mutual and major UK mortgage lender HBOS, reflecting the seismic change in the global financial landscape.
"Banks are still reluctant to lend money to each other, everybody seems to sit on stockpiles of cash," said Markus Ammann, a trader at Bayerische Hypo und Vereinsbank in Hong Kong.
The squeeze eased a notch in early Asian business on Thursday, but U.S. dollars still were in short supply and overnight funds traded at 6-8.5%, still well above their usual level close to the Federal Reserve's 2% target.
The Bank of Japan, pumped 2.5 trillion yen ($23.92 bln) on Thursday into the money market, topping up the 5.5 trillion injection in the past two days, as overnight rates crawled back above the central bank's 0.5% policy target.
Australia's central bank added a total A$3.015 bln ($2.40 bln) in cash to the market in its daily operation, bringing its injection this week to A$11.2 bln. In India, the central bank supplied banks with 62.4 bln Indian rupees ($1.35 bln), its biggest injection in at least a month.
Well-oiled money markets where banks lend short term funds to each other to smooth out daily swings in their balances are crucial for the proper functioning of the financial system and the economy at large.
Banks around the world have responded to the squeeze, exacerbated by investors' flight into safe havens of gold and government bonds, by flooding markets with cash and verbal reassurances, but with only limited success.
China's central bank surprised markets by allowing yields on its three-month bills to drop 4 basis points to at an auction after keeping the rate steady for six month. That was effectively the second policy relaxation this week after a interest rate cut on Monday.
Eight out of nine currencies in emerging Asia tracked by Reuters fell on Monday and traders said the Philippines central bank was in the market selling dollars to support the peso.
Taiwan said it may use a state fund set up to smooth out market swings, to put a floor under the stock market that lost 10% this week.
The Bank of Korea said it was selling dollars in the local dollar/won swap market and a finance ministry official said the government may reduce bond sales to support debt prices.