Calming Jittery Markets
August 17, 2007
"There are the necessary contacts on all levels," Peer Steinbrück said. "Thus far they have proved very fruitful. We are in close contact at the national and the international level."
In Berlin, government spokesman Thomas Steg said the outlook for the German economy remained fundamentally positive. "There is no reason to believe that financial market uncertainty will jump over to the real economy," Steg said.
He welcomed an initiative from EU Internal Market Commissioner Charlie McCreevy to look into the activities of the ratings agencies that assess credit risks.
The agencies stand accused of failing to spot the looming crisis in US subprime mortgage lending before it broke.
Fed interest cut causes market surge
Meanwhile, German shares rose strongly in Friday's afternoon trading on news that the US Federal Reserve (Fed) had cut the interest rate it charges commercial banks by half of a percentage point.
After a morning during which leading shares traded on the Frankfurt bourse fell 1 percent within minutes of opening, the leading DAX 30 index rose to a high of 7,490, from a morning low of 7195, before declining to 7,451 in profit taking.
The MDAX index of medium shares and the TECDAX technology index followed a similar course.
German banks gained ground following heavy losses over the past week, while industrials such as BASF, ThyssenKrupp, Continental, DaimlerChrysler, and MAN were the top losers.
London's FTSE 100 index of top shares also surged by almost 4.0 percent to move back above 6,000 points on the Fed news while the Paris market also rose by around 3.0 percent.
Soothing stateside jitters
The Fed's surprise move marked its most decisive action since the financial markets became gripped by fears over a global credit crunch.
The Fed said it had lowered the rate it levies on loans to banks by 50 basis points to 5.75 percent, citing "increased uncertainty" in the financial markets.
"Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward," the Fed cautioned in a statement.
The central bank lowered the so-called "discount" rate to help soothe the US banking system which has been stressed in the past week by a credit crunch linked to the distressed housing market.
It is extremely unusual for the Fed to act outside of its scheduled rate meetings and the last time it did so was on Sept. 17, 2001, after the terrorist attacks that targeted New York and Washington.
The move does not affect its key short-term federal funds interest rate which stands at 5.25 percent.
Fed hoping to restore "orderly conditions"
The Fed -- which has also injected tens of billions of dollars into the stretched financial system in the past week -- said it had trimmed its discount rate in a bid to restore "orderly conditions in financial markets" which have been rocked by credit fears and the troubles plaguing the housing market.
"Although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably," the Fed said.
The central bank said it was continuing to monitor the situation and that it was ready to act as necessary "to mitigate the adverse effects on the economy arising from the disruptions in financial markets."
US banks have tightened their lending practices in recent weeks as the financial storm affecting mortgage firms has worsened and many investors have shunned mortgage-backed securities amid a jump in home foreclosures.