ECB renews $50b loans

October 6, 2008
Shares

, FRANKFURT, October 6 – The European Central Bank said Monday it would pump 50 billion dollars (37 billion euros) into eurozone interbank lending markets in what has become a daily effort to keep cash moving in a system that has almost completely frozen up.

The results of the ECB\’s one-day offer, including demand and the rate at which the dollars are lent, were to be released later in the day.

A short time later, the ECB said it would withdraw up to 220 billion euros (300 billion dollars) from the markets at its benchmark rate of 4.25 percent in what it calls a fine-tuning operation.

An ECB offer of dollars on Friday to tide eurozone banks over the weekend was met with very strong demand, as 59 banks sought a total of 82.9 billion dollars, and paid 2.51 percent for the funds that were available, the ECB said.

The response confirmed that eurozone money markets remained under strong pressure, in particular with respect to the need for dollars.

But when the central bank determines there is surplus cash in other parts of the interbank markets it siphons the necessary amount off to prevent the excess from fuelling inflation and to maintain rates near its benchmark levels.

Last week, the ECB carried out three such transactions, which it calls fine-tuning operations, withdrawing a total of 567 billion euros from the interbank markets.

On Monday, the central bank extended participation in its exceptional fine-tuning operations to many more financial institutions if they fulfilled certain criteria.

National central banks would determine which banks would become eligible, the ECB statement said.

The decision was expected to raise the number of eligible institutions from around 130 previously to some 1,700.

Since the end of last week, governments in Germany, Greece and Ireland have issued guarantees to cover savings in the countries\’ banks, and other European states were under pressure on Monday to bolster their financial defences as well.

Commercial banks generally lend and borrow cash from each other on interbank markets but these have dried up since the US market for high-risk, or subprime, mortgages collapsed more than a year ago.

The ECB and other major central banks have been pumping huge amounts of cash in the form of loans to ease turmoil stemming from the latest crisis in the US financial sector, after the investment bank Lehman Brothers went bankrupt last month.

Some analysts question whether the central bank moves are working however, saying that commercial lenders soak up the extra cash but do not lend to each other or extend it as credit to businesses.

They reportedly use some of the funds to buy government treasury bills because they are presently considered one of the safest investments.

Shares

Latest Articles

Stock Market

Most Viewed