The European Central Bank extended unlimited amounts of two-week cash to the markets yesterday, an unprecedented step aimed at easing a global credit squeeze that risks choking off the commercial bank lending on which business depends.
The ECB said it allocated more than $500 billion (Dh1.8bn) at a flat rate of 4.21 per cent in a refinancing operation spokesman Niels Buenemann said was aimed “at helping the banks over the end-year period”.
Buenemann said while the operation should help smooth out a period “which is always tense, but this year particularly”, the ECB would make more cash injections in 2008 if needed to ensure credit markets were well supplied. “There is no time limit” to the central bank’s refinancing strategy, he told AFP. Its reference refinancing rate currently stands at 4 per cent.
The Euribor money market rate for two-week funds fell following the announcement to 4.45 per cent from 4.95 per cent on Monday, while the three-month rate eased back to 4.88 per cent from 4.95 per cent.
Analyst reactions to the ECB move varied, with many agreeing the year-end explanation held up, while also noting market concern that things could be worse than previously thought among the eurozone banks.
“It’s beginning to look a bit more desperate, isn’t it?” said Johathan Loynes at Capital Economics. “It raises concern that things must be particularly bad in the eurozone,” he said, in particular since co-ordinated action announced last week by five major central banks in Europe and North America had not calmed money markets.
At Investec Securities in London, economist David Page added: “It does beg the question whether or not the ECB has a greater level of concern about banks within the eurosystem banking setup than elsewhere.” A currency swap announced last week between the US Federal Reserve and the ECB, which would provide dollars to eurozone banks, suggested to Page that the biggest problem was losses connected to the US sub-prime housing market debacle.
“The implication is that a lot of eurosystem banks are exposed in US markets, perhaps more so than we are currently aware of,” he said.
Bank of America economist Gilles Moec focused on the year-end issue, when banks close their books amid increased demand for cash owing to the holidays.
“The ECB is trying to flood the money market with cheap liquidity” and bank officials “hope that once the year is through, banks will resume lending to each other”.
Credit markets dried up owing to fears that banks seeking to borrow money might face huge sub-prime-related losses and not be able to repay the loan.
Many banks were now also hoarding cash, Moec said, “to show shareholders and investors they are not at risk and can cope with the consequences of the sub-prime crisis”. The ECB operation was its most exceptional move since it acted in early August to stem the emerging credit crisis that was sparked by a meltdown of the US market for high-risk mortgages.
The amount was also nearly two times greater than the ECB’s estimate of actual refinancing needs of 180.5bn euros (Dh956.8bn).
Loynes said it came on the heels of joint central bank announcements last week, adding: “I get the sense that the ECB is rather enjoying trying to be sort of one step ahead of the other central banks.”
Last week, the ECB, along with the US, British, Canadian and Swiss central banks said they would provide more than $60bn (Dh220bn) to money markets over longer periods and under easier-than-usual conditions in a joint effort to get credit flowing again.
Page said each central bank was using the tools best adapted to its specific circumstances and said: “This is part of an ongoing set of policies that the ECB has been very much at the avante garde of implementing.” In Britain yesterday, the Bank of England offered £11.35bn (Dh84bn) in its own refinancing operation, with the offer attracting only more bids than was on offer.
Analysts said that meant demand might be easing and accordingly that money market rates should fall. (AFP)
FUNDING SPREE HURTS BONDS
US Treasuries eased yesterday as stock futures pointed to a stronger open amid global central bank’s co-ordinated effort to fight off a credit crunch with billions of dollars in liquidity.
The Fed conducted the first of its auctions on Monday, allowing banks to borrow cheaply and anonymously in the hope that they in turn would continue to lend to businesses and keep the economy from derailing. Tentative signs of success kept safe-haven bonds under pressure. (Reuters)