Tuesday, December 18, 2007

ECB Injects $500B into Euro Money Markets

The ECB injected $500B into the euro money markets which brought down the rates on euro loans through the end of the year. Or the banks should now have enough cash at reasonable rate to get them through the end of the year (accounting period). With all that said, the central banks in the UK and US have not had that level of luck yet. Text in bold is my emphasis. From Bloomberg:

The cost to borrow in euros through the end of the year plunged after the European Central Bank added an unprecedented $500 billion to the banking system as part of a global effort to ease gridlock in the credit market.

The amount banks charge each other for two-week loans in euros dropped a record 50 basis points to 4.45 percent, the European Banking Federation said today. The rate had soared 83 basis points in the past two weeks as banks anticipated a squeeze on credit through year-end.

``These are strong-arm tactics intended to show the market they're seriously committed to breaking the deadlock,'' said Marc Ostwald, a fixed-income strategist at Insinger De Beaufort SA in London. ``The ECB is helping to bankroll banks out of a problem that they themselves created.''

The decline may be a sign attempts by policy makers to revive interbank lending are succeeding.

The Federal Reserve announced last week the biggest coordinated central bank action since Sept. 11, 2001, amid concern surging money-market rates and estimates of $400 billion in losses linked to U.S. subprime mortgages will slow economic growth.

Until today, central bank measures have had little effect. The cost of borrowing in dollars for two weeks rose today even after the Fed held the first of four cash auctions yesterday. Two-week rates for U.K. pounds surged.

This ``doesn't address the fundamental issues of banks hoarding cash and while the central bank has succeeded in stabilizing the shorter-term rates, it makes little impact on the longer-term rates,'' said Lena Komileva, an economist at Tullet Prebon in London.

The ECB loaned a record 348.6 billion euros ($501.5 billion) for two weeks at 4.21 percent today, almost 170 billion euros more than it estimated was needed.

Bids were received from 390 banks, ranging from 4 percent to 4.45 percent, the ECB said today. The central bank first offered extra cash on Aug. 9, when it lent 95 billion euros of emergency funds. Banks also borrowed about 2.4 billion euros at 5 percent yesterday, the most since Sept. 26, the ECB said.

``Maybe this is the sign we've all been waiting for that a peak in Libor has been reached,'' said Patrick Jacq, a fixed- income strategist at BNP Paribas SA in Paris. ``It's a definite sign of an improvement in the market.''

The cost of borrowing in dollars for two weeks increased 1 basis point to 5.10 percent, the British Bankers' Association said today. The Fed yesterday offered $20 billion in one-month loans. The results will be announced tomorrow.

The corresponding rate for pounds soared 77 basis points to a record of 6.51 percent, the BBA said. Today is the first day that pound-denominated loans cover a borrower's commitments through the end of the year.

The Bank of England held the first of two special operations today, offering 10 billion pounds ($20 billion) of three-month cash. The cost of borrowing pounds for three months dropped 4 basis points to 6.39 percent, the fourth straight decline. That's still 89 basis points higher than the central bank's benchmark interest rate.

Central banks in the U.S., U.K., Canada, Switzerland and the euro region are responding to subprime mortgage-related losses at financial institutions including Citigroup Inc., Merrill Lynch & Co. and Bank of America Corp.

Goldman Sachs Group Inc. estimated last month losses related to record home foreclosures in the U.S. may be as high as $400 billion for financial companies. If accurate, banks, brokerages and hedge funds would need to cut lending by $2 trillion, triggering a ``substantial recession,'' the firm said.

U.S. corporate defaults probably will quadruple next year after the number of companies that lost their investment-grade credit ratings rose at the fastest pace since 2003, according to Moody's Investors Service.

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