Fed, ECB vow to offset Y2K-style year-end credit squeeze

HSBC Holdings hbc on Monday highlighted the nature of the stress and said would take its two structured investment vehicles (SIVs), Cullinan and Asscher, onto its balance sheet to avoid a forced sale of their underlying assets.

HSBC said it hoped the move would restore some confidence to the sector whose access to short-term funding has been severely limited since the credit crunch bit earlier this year.

Goldman Sachs downgraded HSBC shares to 'sell,' saying HSBC would probably need to set aside a further $12 billion against losses on U.S. mortgage debt, in addition to providing up to $35 billion in backing for the investment vehicles.

But while absorbing troubled SIVs onto bank balance sheets might be the endgame of this latest financial crisis, analysts said it will tie up capital that would otherwise be lent out. And that is the route by which the underlying economy feels the heat from what has been a mainly financial blowout to date.

Clamor for more official action has increased as a result.

"Without stronger policy responses than have been observed to date ... there is the risk that the adverse impacts will be felt for the rest of the decade and beyond," former U.S. Treasury Secretary Lawrence Summers wrote in Monday's Financial Times.

And some analysts said that if the real economy is now threatened, active central bank liquidity management alone may not be enough and more interest rate cuts may be needed.

"While the ECB has been very proactive in its liquidity provisions, it separates that from its monetary policy decisions," said Eoin O'Callaghan, economist at BNP Paribas.

"But the only way you can separate the two is if you believe the financial market problems do not affect the real economy. Now that's becoming less and less of a fair assumption."

Meanwhile Britain's main casualty in the global credit crisis, Northern Rock, found a potential rescuer.

Northern Rock said a consortium led by Richard Branson's Virgin Group was its preferred bidder and planned swift repayment of 11 billion pounds ($22.6 billion) of emergency lending from the Bank of England.

The French bank hardest hit by the market crisis, investment bank Natixis, on Sunday put the cost at 407 million euros ($602.6 million) for its third-quarter results.

Contributing: Barbara Hagenbaugh, USA TODAY; Reuters

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