Well, ho, ho, ho. It’s the five Santas with gifts for all. The world’s central bankers yesterday announced their first joint plan of action since the 9/11 terrorist attacks.

Yesterday’s co-ordinated financing arrangements got traders kissing under the mistletoe, but when the booze wears off, what the hell have they done and will it work?

What Happened Yesterday?
The world’s top central banks, led by the US Federal Reserve, sought to free up the global money markets by making billions of Dollars and Pounds available for banks to borrow, allowing them to bid anonymously.

The benefits of this action are that the banks won’t be reliant on borrowing from each other in the short-term, the rate of interest will be lower, there will be ample funds available for the more important 3-month borrowing period and the types of security accepted against the loans have been widened to include more types of debt.

The initial reaction was one of joy and glad tidings. The Dow immediately leapt 200 points, the FTSE jumped over 100 points to just above 6600 and the Dax rose by a little less than 100 points. Gold and oil shot up as well, but oil is one of the few markets to have held those levels.

Some Detail For Those Who Care
If you’re only interested in the basic concept you can fast-forward to the next bit. For those that want a bit of detail here goes:
The Federal Reserve will hold two auctions this month, and a further two in January, when it will offer a total of $40 billion in funds, available for 1 month. The Fed also entered into a swap agreement with the European and Swiss National Banks, providing $24 billion for banks in Europe to access before the US markets open.

The Bank of England will hold long-term repo operations on the 18th December and 15th January, offering funds for between 3 and 12 months. The Bank has increased the sums available in each case from £2.85 billion to £11.35 billion, with most of that aimed at the 3-month period. The other notable feature is that funds are offered at the rate bid by the banks, rather than the original penal rate of 1% over base rate.

The ECB hasn’t done much other than offering the facility provided by the Fed to borrow Dollars. Banks will be able to bid for funds in the 1-month area on the 17th and 20th December.

The Bank of Canada also announced changes to its rules, widening the type of collateral allowed to be submitted as security.

The Japanese and Australian central banks voiced their support (cheers lads).

What’s The Big Deal?
This has more significance than the Spice Girls getting back together. Central banks don’t usually do ‘co-ordinated actions’ and, taking a step back, the main ones form the characters from the old spaghetti western classic The Good, The Bad And The Ugly.

Big Clint Bernanke has been putting aside his fears on inflation and has been keen to bail out the Country’s risk-takers; the Lee Van Cleef bad guy, played by Monsieur Trichet, on the other hand, has threatened to raise official rates if inflation and/or wage demands continue to rise. And the ugly little f**ker with the confused expression is the UK’s Swervin Mervyn King, more recently referred to as King Useless. He knows that inflation is a risk in the UK, and that cutting rates to bail out over-zealous buy-to-let speculators is wrong, yet last week he gave in to (political?) pressure and cut rates.

The banks all holding hands together is a big deal because it conveys the seriousness of the problem, without provoking individual national worries. They’re also showing a united front in grasping the situation (the reluctance of banks to lend to each other) and acknowledging that it won’t be solved by straight-forward rate cuts.

So Who Gets The Best Pressies?
It will mean that central bankers can enjoy Christmas, free from more media headlines about inactivity. This action ought to lead to a fall in money market rates (those that have been hugely higher than the official rates). This should limit (if not prevent) the banks passing on higher mortgage rates and loan charges to you and me. On a wider scale the hope is that more finance will be made available to businesses and industry at lower rates. The danger is that they merely keep hold of the extra funds to offset against the money they’re still losing on sub-prime loans.

And Who Gets The Broken Toy?
In a way we all do; as with most Christmas gifts this one won’t last long into the New Year. OK, The Fed is considering making the arrangement permanent, but think of it in a different way:

Say you got carried away with your flexible friend recently (No I’m not talking about an easy pull in Major Tom’s) and spent a bit too much on that 50” plasma telly with surround sound and a year’s supply of popcorn. You haven’t got the money to pay it off and the interest rate is an extortionate 28%. You’re really struggling to meet the payments until Santa knocks at the door and says,
“Ho Ho Mate. I can see you’re going to have a real crap Christmas. Tell you what I’ll do, I’ll lend you the money at a much lower rate so you can pay off your visa and have a right rollicking Christmas.”

Good ol’ Santa, but what’s the outcome? You’re now only paying interest back on your loan at a rate of, say, 7%. That’s a big result and means that you now have enough to buy something for the missus, but come January you’ve still got a whacking great loan and you’re not sure how long Santa’s generosity is going to last for.

This is a sensible way of sorting out a short-term problem, but magic wands come from the same place as Spurs Premiership Titles-Neverland. The underlying problem of banks having too many bad loans, and not wanting to lend to each other cos they know they’ve got too many bad loans isn’t going to go away soon. Housing cycles are like ocean liners and me running, they don’t turn quickly, so the loan values aren’t going to rise in the next few months.

The Batteries Have Gone Flat Already
Today’s fixing of money market rates showed a small fall in UK and US rates, but a disappointing lack of change in Euro rates.

Equity markets fell overnight and continued the move today. FTSE is hanging on to support from its 200-day moving average at around 6430, but the knuckles are going white; the Dow bounced off the same indicator last night but is straddling the 13400 level. The Dax is nearly 300 points above its 200-day target and not looking too bad.

Currencies look pretty random and directionless at the moment. For choice, I favour trading equities and of those I’m watching to see if FTSE can break and hold below its 200-day moving average and the 6400 level, which is also a key support area.

Nice try Santas, but what’s left in your sack now?

Happy Trading

EDITORIAL NOTE: This article was updated at 21.05 on 13th December with more information on the Bank of England and Bank of Canada’s funding conditions.