Europe in cash bid to ease credit

Money markets flooded with funds amid talk of "self-reinforcing downward" spiral.

    Problems in the US mortgage market have caused liquidity to dry up in money markets [AFP]
    Tuesday's move was part of a co-ordinated action with other central banks to ease market tensions by offering cash at favourable rates.
    BoE charged a minimum bid rate of 5.36 per cent for its offer of 10 billion pounds of three-month money.

    The money was taken up though demand was muted.


    Minimum rate


    Previous similar auctions had failed as the BoE had set a minimum rate way above the main lending rate and no bank wanted to be seen as desperate for cash.


    "In the last four weeks, banks themselves have been worried that the impact of their reluctance to lend will lead to a sharper slowdown in the United States," Mervyn King, the BoE governor, told a parliamentary committee.


    "That concern is a serious one because it does hold out the prospect that there will be a self-reinforcing downturn in credit and activity."


    Most experts say the joint action, whereby the Fed, SNB, ECB, BoE, Bank of Canada and others provide fresh short-term lending, is unlikely to solve the crisis alone.


    The European Commission said the global credit crunch would curb euro zone economic growth in the coming quarters but activity will be supported by robust employment and record-high corporate profitability.


    Hefty bids   


    Banks on Tuesday bid for a hefty 348.6bn euros ($500bn) at a 4.21 per cent lowest rate. Two-week Euribor interbank rates fixed sharply lower in response.


    The offer was the first time the ECB has said it would meet all banks' refinancing bids above a certain rate since its first liquidity injection on August 9, as the credit crunch blew up.


    On Monday, the ECB offered $20bn of 28-day funds at auction as part of the joint plan by leading central banks to alleviate strains in the interbank lending market.


    The US Federal Reserve offered a similar amount, while the Swiss National Bank (SNB) offered up to $4bn at a discount to the Fed's existing discount rate.


    Results of those auctions are due on Wednesday.

    SOURCE: Agencies


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