The Credit Crisis Spreads to Banks Around the World
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This is the VOA Special English ECONOMICS REPORT.
This week, economic worries turned from inflation. On Wednesday, central banks in nations around the world acted together to lower interest rates. The fear is that a lack of credit and falling demand could cause a deep, worldwide recession.
The International Monetary Fund has warned that the world is facing its most dangerous economic crisis since the nineteen thirties.
To fight slowing economic growth, the United States Federal Reserve cut its federal funds rate to one and one half percent. That is the rate banks charge each other for overnight loans. The European Central Bank also announced an interest rate cut. So did central banks in Britain, Canada, Sweden and Switzerland. Australia and China also cut interest rates.
The action marked the first time that the Federal Reserve has joined with other central banks to cut interest rates.
Tuesday, the Fed said it will make short-term loans by purchasing what is called commercial paper. Such loans usually come from pools, or collections, of investment money. The goal is to provide financial help to all companies that need short-term loans to operate. Earlier, the central bank announced loans to banks of up to nine hundred billion dollars.
European countries are also taking steps to deal with the crisis. The Economist magazine reports that European banks have borrowed more against their bank deposits than American banks have. This puts them at greater risk when there are low levels of activity in credit markets.
Iceland is an example. Its banks borrowed many times the amount of money they held in deposits. In recent weeks, Iceland has had to seize three major banks. The nation has asked for a loan of more than five billion dollars from Russia to avoid a collapse of its financial system.
Other countries have taken steps to keep people from withdrawing money from banks. Ireland, Germany and Britain increased the limit of bank deposits guaranteed by their governments.
And, the British government has announced a rescue plan similar to the one passed by the United States Congress. Britain will make eighty-seven billion dollars available to eight major banks. It will also provide hundreds of billions of dollars in loans and guarantees to the banking system.
And, that is the VOA Special English ECONOMICS REPORT, written by Mario Ritter. I'm Steve Ember.