Thursday, August 23, 2007

ECB move to inject funds lifts markets

ECB move to inject funds lifts markets
Ralph Atkins in Frankfurt, Krishna Guha in Washington and James Politi and John Authers in New York
Copyright The Financial Times Limited 2007
Published: August 22 2007 18:54 | Last updated: August 23 2007 00:00

Investor fears about the credit markets showed signs of easing on Wednesday after European central bankers injected more funds into the financial system and four big US banks lined up behind the Federal Reserve’s efforts to ease the liquidity crunch.

Global equities rallied and safe-haven US government securities continued a sell-off after the European Central Bank said it would add €40bn ($54bn) into the three-month money market, where interest rates have shot higher during the recent turmoil.

The ECB strongly signalled that its monetary policy would not be blown off course, and that it would also raise its main interest rate again next month.

Its move was followed by news that Citigroup, JPMorgan Chase, Bank of America and Wachovia had each borrowed $500m from the Fed under new terms offered last Friday. People close to the banks said they were mainly borrowing on behalf of clients who were hurt by the liquidity crisis but could offer “prime” collateral.

Still, the banks were keen to point out that the scale of the borrowing at the Fed’s discount window was relatively small and largely symbolic. In a statement, JPMorgan, BofA and Wachovia said they had “substantial liquidity and the capacity to borrow money elsewhere on more favourable terms” but were trying to encourage other banks to take advantage of the lower discount rate. Citigroup said it was “pleased to inject liquidity into the financial system during times of market stress and to support creditworthy clients”.

Fed policymakers viewed the move by the four banks as positive, but said the success of the discount window operation should be measured by its calming effect on markets, not the volume of actual lending.

When the Fed cut the discount rate last Friday, it wanted banks to act as intermediaries for investment banks, hedge funds and others who might have good collateral but were unable to deal directly with the Fed.

On money markets, yields on one-month Treasury bills rose 79 basis points to 3.11 per cent, while the yield three-month paper closed up 6bp at 3.66 per cent. However, yields remained below the level they reached last Thursday when a dramatic “flight to quality” preceded the Fed’s decision to lower the discount rate.

European shares rose 1.6 per cent while Asian shares showed strong gains, except for Tokyo, which was flat. The S&P500 rose 1.2 per cent.

By offering three-month loans, the ECB is providing banks with funding for a longer duration. “This eases what has been a crucial pressure point in the system,” said Tim Bond, head of global asset allocation at Barclays Capital.

The ECB said its monetary policy stance remained as set out on August 2 by Jean-Claude Trichet, ECB president, who hinted strongly that its main interest rate would rise by a quarter percentage point to 4.25 per cent next month.

However, Mr Trichet deliberately left open the possibility of a change of mind, especially if market turmoil continued.


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