Second day of ECB action to calm credit markets

  • Business
  • Saturday, 11 Aug 2007

FRANKFURT: The European Central Bank mounted a second day of action to calm panicky credit markets yesterday, after Asian central banks joined a global campaign by monetary authorities to inject extra cash into banking systems. 

The ECB said it would add money through the weekend to calm markets, saying it “aims to assure orderly conditions in the euro money market”. The Swiss central bank also offered money at below-market rates. 

The news helped steady nervous trading in European money markets, where a record-setting ECB injection of 94.8 billion euros (US$130.6bil) cash on Thursday was due to flow out of markets. 

In Asia trading, the Bank of Japan and the Reserve Bank of Australia have added more money than usual to prevent short-term rates from spiking, albeit on a much smaller scale than the ECB's amount. 

“What the central banks are doing is a concerted effort to inject liquidity. And the worrying thing is that they do that when the system is not functioning the way it should,” said Jimmy Koh, a currency strategist at United Overseas Bank. 

At the same time, Malaysia, Indonesia, the Philippines and Taiwan stepped in to support their currencies by selling US dollars, traders said, as escalating credit market worries hit risky assets around the region. 

The moves came after the ECB pumped a record amount of cash into Europe's money markets to make sure that banks had adequate short-term funds for lending. The US Federal Reserve followed suit on a smaller scale at US$19bil yesterday. 

The trigger was news that France's biggest-listed bank, BNP Paribas, had frozen US$2.2bil worth of funds hit by US subprime mortgage woes. 

The ECB said yesterday it would offer money for three days at a variable rate, with minimum bids of 4%. For the second day in a row, it set no limit on how much. 

A Bank of Japan official said the bank injected funds at its regular money market operation yesterday due to a slight rise in the benchmark overnight call rate. The bank offered to supply one trillion yen (US$8.45bil) in funds – at the higher end of market expectations. 

The Reserve Bank of Australia pumped more than twice the usual amount of money into the banking system, injecting A$4.95bil. 

But financial markets took a battering, in part because the unusual ECB move unsettled traders. 

Asian stocks fell sharply and the yen extended its gains as investors dumped riskier assets. The flight to safety shored up Japanese government bonds and US Treasuries. – Reuters  


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