ECB and Fed take new steps to calm panicked money markets

FRANKFURT (AFP) - The European Central Bank took major steps Monday to ease chronic tension in interbank money markets, as authorities around the world scrambled to respond to a dogged financial crisis.

The ECB and US Federal Reserve decided to double temporary reciprocal currency agreements, or swap lines, to 240 billion dollars (167 billion euros), an ECB statement said.

Eurozone banks would therefore have direct access to more dollars directly from their central bank, which also said it was "prepared to take appropropriate steps as needed to address funding pressures."

The ECB, using a separate procedure, said earlier Monday it had loaned eurozone banks 120 billion euros (172 billion dollars) in a special 38-day operation aimed at soothing extreme tension on interbank money markets.

The ECB said in a statement that "the special term refinancing operation will be renewed at least until beyond the end of the year," amid increased pressure at the end of the third quarter.

"The ECB will continue to steer liquidity towards balanced conditions" in an attempt to bring interbank interest rates in line with the bank's own minimum rate, it added.

Commercial banks usually lend and borrow cash on interbank money markets but these have almost completely dried up since the US market for high-risk, or subprime, mortgages collapsed more than a year ago. The ECB and other major central banks have thus been pumping hundreds of billions of dollars, euros, pounds and other currencies in the form of loans into such markets.

On Monday, the ECB also rolled over one-day dollar loans to eurozone banks, renewing that operation for a total amount of 30 billion dollars (20.8 billion euros) with money obtained from the Fed through a currency swap.

A Fed statement issued in Washington said that joint operations with central banks from Europe, Japan, Canada and Australia were now worth a total of 620 billion dollars.

"Injections of dollar liquidity by the ECB, Bank of England and Swiss National Bank have highlighted the sizeable dollar exposures among European banks," Citibank analysts wrote on Monday. "We suspect that both the European economy and European financial system are more vulnerable than many realise," they added.

Major central banks agreed last week to inject billions more dollars into money markets that have been battered by the chronic crisis, with a focus on getting banks over the end of quarter period, when they seek to beef up their cash holdings. Some analysts question whether the central bank moves will work however, saying that commercial lenders soak up the extra cash but still do not lend to each other or extend it as credit to businesses. Rather, they may be using some of the funds to buy government treasury bills because they are presently considered one of the safest investments.