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US Rescue Plan to Lead the Way

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US Rescue Plan to Lead the Way

The global economic slowdown received a brief respite this week when the Obama Administration revealed the final details of its Public-Private Investment Programme. Within hours of news of the Programme’s finer points, shares on stock exchanges worldwide rallied with those on the New York Stock Exchange and NASDAQ leading the way with a surge of almost 7% on Monday.

The latest US attempt to revitalise its banking system is the most ambitious yet and involves at least US$500 billion in funds with the potential for these funds to increase to a massive US$1 trillion. The Programme’s main objective is to purge the US banking system of the so-called toxic mortgage-related assets, which many claim to be the origin of the current global financial crisis.

The Programme involves trade-offs between private investors, the Treasury, the Federal Reserve and the Federal Deposit Insurance Corporation and essentially gives private investors bonds to buy bad debts from the banks. This will allow banks to cleanse their balance sheets and therefore access private markets for new capital and expand their lending capacity. By offering bonds to private investors, the US government will avoid using tax payers’ money to relieve bank debts.

Seen by analysts globally as a major move in the fight against recession, the Programme has been well received worldwide. Asian markets also rallied on the back of the Programme’s announcement – Japan’s Nikkei index reached a 10-week high – and the FTSE 100 index opened almost 40 points higher.

“The removal of toxic assets from the US banking system will do a lot towards stabilising the global financial situation,” comments Barry Aldridge, Director of Obelisk Private Finance. “It’s undoubtedly a step in the right direction and may well signal the start of an economic recovery.” However, Barry points out that recovery is going to take time – “I think it’s wise to be cautiously optimistic,” he says.

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