Monday, August 13, 2007

Monday Sees More Injections by Central Banks

The excerpts below are from a Reuters article concerning more injections from central banks including the Fed. Maybe that is why the markets act like they have had too many valium.

Central banks in the world's leading economies pumped extra money into the financial system for a third straight trading day on Monday, but in far smaller amounts as investor nerves steadied over the dangers of a credit squeeze.

The European Central Bank lent out an extra 47.67 billion euros (32.2 billion pounds) in overnight funds, its smallest amount since lending rates shot up last Thursday on fears European banks faced huge exposure to risky U.S. mortgage debt.

Meanwhile the U.S. Federal Reserve also injected $2 billion (1 billion pounds) in extra cash on Monday. That was well below the $38 billion injected to stabilize money markets on Friday, the largest amount for any single day since September 19, 2001.

The ECB said markets were beginning to return to normal, while the Fed reiterated it was ready to provide cash to the financial system as needed. That sent a soothing signal to stock markets, including Wall Street, which recovered from steep falls last week. . . .

Analysts said a global credit crunch seemed to have been averted for now. But until the full extent of losses related to the U.S. subprime mortgage market had been revealed, the market will remain on the defensive.

"This particular eruption appears to be fading, but it is the symptom that is fading and the underlying problem, which is that we don't know the exact location of subprime losses, remains," said Lou Crandall, chief economist at Wrightson ICAP.

"The system's vulnerability to these sorts of liquidity issues is still present." . . . .

Central bankers cumulatively have so far injected a massive and unprecedented amount of roughly $400 billion into money markets that had almost seized up in panic over exposure to complex credit derivatives linked to defaulting U.S. mortgages.

The money, however, is temporary and did not flood in all at once, rather the short-term lending to banks is repaid usually the next day.

But one central bank taking a harder line, the Bank of England, said it would not lend cheaply to banks feeling the squeeze from the current financial market turmoil and its standard emergency lending rate of 6.75 percent applied.

Investors' main worries are undisclosed losses resulting from toxic debt that could trigger the collapse of banks and funds. It is this concern that has prompted banks to hoard cash rather than lend it to each other in short-term trades as usual, making interbank lending expensive.

Much of this liquidity has already been withdrawn from the system, however, since it was made up of short-term lending to banks that must be repaid the next day.

Industry sources said central bankers in Europe held talks with bank supervisors and financial executives over the weekend to assess the dangers from risky mortgage debt to the financial system.

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