Europe pumping cash into money markets

September 15, 2008 6:26:39 AM PDT
Europe's major central banks moved quickly to calm markets Monday, pumping billions of euros and pounds into the financial system to shore up confidence in the aftermath of Lehman Brothers Holdings Inc.'s bankruptcy filing in the United States. The European Central Bank said it received 51 bids for 90.3 billion euros ($127 billion) on its one-day tender of 30 billion euros ($42.6 billion) with a bid rate of 4.25 percent, a clear sign that demand for cash is over the top.

ECB President Jean-Claude Trichet, speaking at an awards ceremony in Frankfurt, declined to comment on Lehman Brothers, but the bank, which oversees monetary policy for the 15 countries that use the euro, said in a brief statement that it continued "to closely monitor the conditions in the euro area money market. The ECB stands ready to contribute to orderly conditions in the euro money market."

Similarly, the Bank of England in London offered 5 billion pounds (nearly $9 billion) in a three-day auction that drew bids for 24.1 billion ($43 billion), or nearly five times the amount that was offered.

The Zurich-based Swiss National Bank said it was also providing liquidity in "a generous and flexible manner" at an overnight rate of 1.9 percent, but wouldn't say how much was on offer.

Global stock and credit markets have been roiled by the decision, which came after last ditch talks to find a suitor for the Wall Street institution collapsed this weekend. The 158-year-old Lehman was crippled by $60 billion in soured real-estate holdings and unable to find an investment partner to throw it a lifeline.

Howard Archer, chief European and UK economist with Global Insight, said the moves by central banks were aimed at reducing market jitters. "There is obviously widespread concern about other banks' exposure to Lehman Brothers, not only in the U.S. but also in Europe," he said, noting that its collapse is certain to create concern that other banks could fail.

"As a result, banks are likely to become even more reluctant to lend to each other, thereby increasing the risk that the credit crunch will deepen and last for some considerable time to come," he said. "This in turn increases the already serious downside risks to growth in the U.K. and the euro zone, and heightens the danger of recession. Hence, central banks' keenness to provide extra liquidity."

On Sunday, a global consortium of banks, working with government officials in New York, announced a $70 billion pool of funds to lend to troubled financial companies with the aim of preventing a worldwide panic on stock and other financial exchanges.

Ten banks - Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Merrill Lynch, Morgan Stanley and UBS - each agreed to provide $7 billion. The U.S. Federal Reserve also chipped in with more ready cash through its emergency lending program for investment banks. The central bank announced late Sunday that it was broadening the types of collateral that financial institutions can use to obtain loans from the Fed.

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