[FoRK] Central banks pump cash to calm markets

Eugen Leitl <eugen at leitl.org> on Thu Aug 9 12:39:04 PDT 2007

http://www.msnbc.msn.com/id/20197758/

Central banks pump cash to calm markets

Traders on edge, waiting to see if Federal Reserve will follow suit

Reuters

Updated: 12:21 p.m. ET Aug. 9, 2007

OTTAWA/FRANKFURT - Major central banks swept in to calm credit markets
spooked by mounting losses on Thursday and injected cash to prevent the
financial system from seizing up.

The European Central Bank pumped a record 94.8 billion euros ($130.6 billion)
into Europe’s money markets as banks scrambled for cash after France’s
biggest listed bank, BNP Paribas, froze withdrawals from three funds. It
cited U.S. subprime mortgage market problems.

Another separate European fund valued at 750 million euros was frozen too,
and a Dutch bank pulled its planned new listing after suffering subprime
losses.

The Bank of Canada said it was ready to provide funds to support the
stability of its financial system, while the U.S. Treasury said it was
monitoring markets and “remains vigilant.”

U.S. President George W. Bush sought to calm fears that a credit market
squeeze would unpick economic growth, telling a news conference both the
global and U.S. economy are strong and there is enough liquidity in the
system.

Traders were on edge, though, waiting to see whether the U.S. Federal Reserve
would follow the ECB’s lead and pump in cash. Overnight money in the United
States opened at 5.5 percent, a quarter point above its target.

U.S. interest rate swaps, a measure of market risk appetite, widened sharply
on renewed credit worries. Stocks fell and investors piled into the safety of
bonds, pushing down the yield on U.S. Treasuries and European government
debt.

In Europe, traders said the cash markets were seizing up until the ECB acted.
“There appears to be a dash for cash both in dollars and in euros,” said Nick
Parsons, head of market strategy at nabCapital in London.

“I’m keen to know whether the ECB is speaking with the Fed. We’re interested
to know,” a European money market trader said, noting that even after the ECB
injection conditions were jumpy.

The ECB tried to calm markets by injecting the largest amount of money ever
in a single operation, saying “the aim was to assure orderly conditions in
the euro money market.” It routinely holds quick market operations when there
is a cash imbalance but not since after the U.S. terror attacks in 2001 has
the size neared Thursday’s level.

The BNP problems had sent shudders through European markets already rife with
rumors of worsening troubles in Germany. The Bundesbank hosted a meeting with
banks involved in the rescue of Europe’s highest profile subprime victim yet,
lender IKB, to arrange details of its 3.5 billion euro bailout.

“Nobody wants to lend any money. It’s safety first.” said Karen Birzler, a
money market trader at HVB in Munich.

The cost for banks to borrow money overnight in the eurozone, the world’s
second largest economic region, shot up to 4.62 percent, the highest level
since shortly after the 2001 U.S. terror attacks, and way above the ECB’s 4
percent target.

Only when the ECB offered banks extra cash to assure orderly conditions did
rates return to normal levels. Money market traders, meanwhile, remained on
edge waiting to see whether the U.S. Federal Reserve would inject extra funds
as well.

The New York Fed conducted its routine money market operations, with the
overnight addition of funds of $12 billion, only marginally above what was
expected.

A Zurich-based money market trader called market conditions ”crazy” since Fed
Chairman Ben Bernanke has given no signal of concern that credit markets
could unpick the real economy.

“The market is acting like a yo-yo. It’s all very psychological. The
possibility of a credit crunch returning is starting to spook everyone,” he
said.

A rates strategist at a large European bank in London said that fear of a
scarcity of funds, known as liquidity, whether irrational or otherwise, was
taking hold.

“It’s about lines of credit, fear that credit lines will be called and
institutions will have to make money available to others who are facing big
credit-related losses,” he said.

U.S. dollar deposit rates for tomorrow/next day delivery surged by more than
half a point to as high as 5.86 percent from 5.22 percent on Wednesday,
before easing back to 5.65 percent. It was the first time since December 2000
they had jumped over half a point in a single day, according to Reuters data.

Sterling overnight rates also moved up, as traders complained of liquidity
drying up. But they also said this might be partly down to summer trading in
what was a rumor-filled market.

The scramble for cash forced traders to unwind so-called carry trades, where
low-yielding currencies are sold to finance purchases of higher yielding
assets.

This sparked a broad-based yen rally, but the surge in short-term dollar
deposit rates lent the dollar support against most other major currencies.
Copyright 2007 Reuters Limited. All rights reserved. Republication or
redistribution of Reuters content is expressly prohibited without the prior
written consent of Reuters.

URL: http://www.msnbc.msn.com/id/20197758/

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