European Central Bank Is Set to Inject More Money into the Money Markets This Week

The new mortgage related crisis in Europe, troubles with the bond insurers this time, may cause the the ECB to pump money into the money markets. This dovetails well with a post from last week. Text in bold is my emphasis. From Market Watch:

The European Central Bank has pledged to provide extra funds into the money markets this week and continuing through the beginning of 2008 in a move designed to ease mounting stress.

The central bank for the 13 countries that use the euro as their currency said it will "reinforce" its policy of providing more than usual liquidity "in the upcoming main refinancing operation as well as in the following ones for as long as it is needed and at least until after the end of the year."

The ECB has a regular refunding operation scheduled for Tuesday.

Analysts said stress in the money market intensified last week after a spate of negative news confirmed fears of widespread exposure of European financial institutions to the aftershocks of the collapse of the American mortgage market.

European bond insurers appear to be the latest victims of the turmoil. A pair of French banks said they will invest about $1.5 billion in French-owned bond insurer CIFG Services.

And Swiss Re, the Zurich-based reinsurance giant, surprised analysts with a write-down of $1.07 billion in the value of derivatives backed by U.S. mortgage loans.

The ECB statement was seen as an effort to ease fears that money will not be available in the market. Facing many challenges to their balance sheets, banks have been hoarding cash and this, if taken too far, can freeze financial markets.

Markets have been under pressure since August, when worries that rising defaults in U.S. subprime mortgages caused financial markets to question the value of securities that consisted of pools of these loans and any derivative tied to mortgages.

This led banks to pull back from lending each other funds and markets only began to recover after the ECB and the Federal Reserve injected billions of dollars into the market.

There have been some improvements in markets over the past few months. For instance, the ECB has not added emergency funds since Sept. 6. But the tensions remained just below the surface and seem to be intensifying in recent days, analysts said.

"Global money markets appear to be crunching up again," said Andrew Cates, an economist at UBS.

"Much of the financial system is not working," agreed analysts at BNP Paribas in a research note Friday.

"A number of markets are closed, term finance is illiquid, sources of funding are shrinking, liquidity is thin and more demands are being placed on bank capital," BNP Paribas said.