ECB pumps $50b into money markets

October 7, 2008

, FRANKFURT, October 7 – The European Central Bank on Tuesday pumped 50 billion dollars (37 billion euros) back into interbank money markets on Tuesday, but banks sought more than double that amount, it said.

An ECB statement said 67 banks had requested a total of more than 109 billion dollars, and paid a whopping 6.75 percent for the funds that were available in what has become a daily attempt to keep cash flowing through the key financial pipeline.

A similar operation on Monday had also generated strong demand, with banks requesting a total of almost 91 billion dollars and paying an already stiff 4.0 percent for the money that was available, the ECB said.

The result on Tuesday confirmed that eurozone money markets are under increasing pressure, in particular with respect to the need for dollars.

The rates are way above what banks used to pay each other on interbank markets, but that lending has almost completely dried up, and central banks have become the main source of funds for many commercial banks.

But the ECB is also withdrawing surplus euros that were injected earlier, and said Tuesday it would take back up to 231.5 billion euros (313 billion dollars) in what it calls a fine-tuning operation.

Several such transactions have been carried out since the fourth quarter began and commercial banks no longer required the strong cash reserves they sought as they closed out their books for the previous quarter.

The interbank markets determine the availability of credit for vast numbers of people around the globe, from managers trying to fund their businesses to families and students seeking personal loans.

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.

And the RGE Monitor published on Tuesday by New York University economics professor Nouriel Roubini noted that at present the "only source of liquidity are central banks.

"Despite record liquidity injections into the banking system, banks hoard the cash instead of making new loans for fear they won\’t be paid back," it said.

Commercial banks appear to be using some of the funds to buy government treasury bills because they are presently considered one of the safest investments.

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