Jeremy Warner's Outlook: Central bankers fire off their last cannon

There are only two things that need to be understood about money. One is its cost and the second is its availability. As the credit crisis grinds on, central bankers have been doing their utmost to help out on the first of these two determinants by cutting interest rates. Unfortunately, these actions don't yet seem to have helped ease the crisis. As long as there is a problem with the availability of money, central bankers can cut rates all they like, but it won't persuade bankers to lend.

Likewise, the various attempts to provide the markets with the liquidity they crave don't thus far seem to have done much good either. To the contrary, the credit crisis has grown worse in recent weeks. Sentiment has again deteriorated sharply with the differing modes of operation applied by central bankers having little impact on spreads or money market rates.

Is the advent of "coordinated action" by five of the world's leading central banks likely to fare any better? This is big stuff. Coordinated action is a once every five-to-ten-year event and it only happens if policymakers are truly panicked. That's why markets were unsure whether they should be relieved or alarmed that the G7 has come riding over the hill in this way.

The last time we witnessed such cooperation was in the immediate aftermath of 9/11, and on that occasion there was no formal or simultaneous announcement. News of the fact that central bankers had agreed to act together just dribbled out.

This time around, there were five simultaneous, similarly worded press releases, together with a statement of support from the Bank of Japan, which, though it was fully behind the rest of the G7 bankers, felt that domestic conditions in Japan didn't for the time being merit such action. As such, the operation is thought to be completely without precedent.

The package of measures announced yesterday was designed to impress and reassure, and up to a point it did. Even so, it might have been better executed. Why weren't the measures unveiled at the same time as the Fed's interest rate cut 24 hours earlier? Instead, markets were left to dwell on the inadequacy of the rate cut before it was finally announced that there was extra assistance to come on the funding side of the credit problem.

The botched nature of these announcements is further evidence of the way central banks seem to have lost their traditional sureness of touch. Perhaps surprisingly, the only one of their number to have distinguished itself during the four-month-old crisis is the European Central Bank.

Now that Alan Greenspan is gone, Jean-Claude Trichet, the president of the ECB, has assumed the title of grand old man of central banking and he seems in every respect to have risen to the part, judiciously applying liquidity as necessary and sending out the right coded messages of support. There has been no Northern Rock in his jurisdiction.

As for the Bank of England, yesterday's initiative is a clear departure from its previously hair-shirted approach to easing the plight of the money markets. Up until now, the Bank has faffed around with little bits of money here and there provided at penalty rates of interest that everyone was reluctant to draw on for fear of being stigmatised if it ever got out.

Now the Bank has agreed to wade in with term money support as substantial as that of the US Federal Reserve. Both are providing around $40bn worth of liquidity in two separate auctions apiece, with the possibility of more later. There's no penalty rate, and the rules on collateral have been eased to allow lower forms of security. Ironically, even some mortgage-backed securities fall within the new rules.

The international nature of the support operation across two continents further reduces the risks of stigma. No bank is going to worry too much about participating in these auctions, which are being put in place not for the purpose of bailing out particular participants which may have run into difficulty with their funding, but to prevent the generalised dislocation in interbank lending from cascading down into the real economy and provoking a recession.

Banks have been hoarding cash, not just because they have begun to mistrust the creditworthiness of their counterparties, but also because they fear they might need the money to deal with their own losses and credit needs.

If banks won't lend to each other, they can now count on central bankers to lend to them instead. That helps to make money more available and therefore ought to bring down money market rates to more normalised levels. With luck, this should also have the effect of jump-starting the engine of interbank lending, helping to make credit more widely available again.

Will it work? Central bankers have now fired off their last cannon, so we had all better hope it does.

There hasn't been a banking crisis quite like this one in decades. The Bank of England's mistake was to think that by providing any assistance to markets at all it would be bailing out those who had been reckless in their lending and funding and would therefore create moral hazard.

What has now been recognised is that the sickness has afflicted the banking system as a whole. The good are being punished alongside the bad. Without treatment, what is at present still just a banking crisis of limited impact on the real world threatens quickly to turn into an all-encompassing economic malaise. Let's hope that policymakers haven't left the medicine too late.

Poker-faced Kloppers threatens to walk

Is he bluffing? The hint yesterday from Marius Kloppers, chief executive of BHP Billiton, was that he would walk away from his tilt at Rio Tinto unless his prey took a more realistic approach to valuation.

His tone also turned distinctly more hostile. Up until now, he has applied only gentle persuasion in his attempt to bring his opposite number at Rio, Tom Albanese, to the negotiating table. But yesterday, Mr Kloppers came out all guns blazing, rather in the manner of a full frontal hostile bid where the object of the exercise is to trash the management and tell the world how much better a job of running the show he would be capable of.

BHP had performed better over recent years and it had better prospects. It was all very well Rio arguing that the stock market had failed properly to value the company's assets and prospects, but if this was the case, the same was true of BHP.

Mr Kloppers' proposed bid is all in shares, so the argument is only really about the relative share of the spoils which each of the two merger partners would take. If Mr Kloppers gives away too much to Rio, he only deprives his own shareholders. There is a point at which the takeover would not be worthwhile for BHP. Time for a reality check, was Mr Kloppers' message.

All these points are no doubt well made, but it is also true that the bid as proposed is pretty much dead in the water. Everyone expects BHP to pay more, and Mr Kloppers must have anticipated they would. Where he is probably correct is in arguing that rival bids are extremely unlikely.

No Western company or private equity house could raise the necessary $200bn for a cash bid in these markets, and no other mining company could obtain the same synergies as BHP, and is therefore unlikely to be able to pay as much in shares. As for Chinese wealth funds, issues around Australian sovereignty are likely to sink any ambitions they might have.

In these circumstances, it is either BHP or nothing. Mr Kloppers talks a good game, but he must know he will have to pay more to win. On the other hand, he may be serious in his threat to walk away. Rio has asked for a put up-or-shut up ruling from the Takeover Panel. This ought to bring matters to a head, one way or another. But the move would backfire on Rio shareholders if Mr Kloppers did decide to walk. It is quite a game of poker being played out here.

j.warner@independent.co.uk

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