ECB director says money markets are disrupted again

"The markets are not functioning correctly at the moment," Lorenzo Bini Smaghi was quoted by the Frankfurter Allgemeine Zeitung (FAZ) as saying.

"We must ensure they function correctly again," the ECB board member said, adding that "we must prevent the markets from drying up completely."

The ECB, the US Federal Reserve, the Bank of England, the Bank of Canada and the Swiss National Bank announced coordinated actions this week to ensure banks had ample cash supplies and would keep extending the credit on which business depends.

But after reacting positively to the news, global stock markets have since fallen back again, and Smaghi said that sorting things out fully was a long-term prospect.

The actions marked the third time in three months that the central banks had combined efforts to ease growing tension on global credit markets.

They have been in turmoil since the US market for high-risk, or subprime, mortgages collapsed in August, raising fears among banks that money market counterparts might not have enough funds to repay loans.

"There are many concerns that market players have liquidity problems," Smaghi said. "As a result the risk premiums are rising and markets are drying up."

He stressed that "we must not give in to panic," because despite the financial crisis, "the real economy has remained relatively strong and the banking system is still able to extend credit to businesses."

The eurozone in particular "absorbed the shock really well," the ECB director noted, a fact that underpinned the bank's decision last week not to cut its main interest rate from the current level of 4.0 per cent. (AFP)