Global central banks strive to save melting money markets

FRANKFURT (AFP) - Central banks pumped tens of billions of dollars into money markets again on Friday as analysts used dramatic terms to describe distress in the international bank-lending system. "Apocalyptic", "money market meltdown" and "extreme" tension were some of the descriptions of distress in the interbank lending market, the heartbeat of the interbank system. After expectations of a US debt-rescue deal foundered on deadlock overnight, the US Federal Reserve arranged with the European and Swiss central banks to inject an additional 13 billion dollars (8.88 billion euros) into the markets. This took the total of such "swap" deals with central banks to make dollars available outside the United States to 290 billion dollars as the latest vortex of the 14-month-old subprime crisis ripped through US banking and extended to banks around the world. The European Central Bank was provided with an additional 10 billion dollars and the Swiss central bank with 3.0 billion dollars. Under separate techniques, the Bank of England provided 30 billion dollars for a week, and the South Korean central bank said it would inject at least 10 billion dollars. The Danish central bank, outside the eurozone, announced help for its own money markets. The central banks in Europe used the reciprocal currency arrangements " or swaps " with the Fed to keep eurozone money markets primed as banks closed out their third-quarter books. "These operations are intended to address funding pressures over quarter end," the joint statement said. "Central banks continue to work together closely and are prepared to take further steps as needed to address the ongoing pressures in funding markets." Commercial banks usually seek extra funds at the end of each quarter, but credit has all but dried up in the financial market turmoil, creating huge headaches. "The problem is neither a lack of liquidity nor a question of the level of interest rates; it is essentially a problem of trust between banks," said UBS economist Stephane Deo. Instead of lending money to each other over periods of a week or more, banks now focus on the short-term. "This is a sign (that) the lack of confidence in the system has reached extreme levels," Deo said in an analysis headlined "A money market meltdown." UniCredit Markets chief economist Marco Annunziata said the "money markets are frozen: participants hoard liquidity and banks refuse to lend to each other as counterparty risk has reached new heights." Fears that a massive US plan to bailout the financial sector might be delayed or watered down "have exacerbated money market tensions even beyond the extreme levels touched a week ago when the mood in financial markets was apocalyptical," Annunziata said. The Fed and its partner central banks have provided hundreds of billions of dollars in liquidity in recent months in an onslaught to get banks lending again. "The disruption of the money market could create a major systemic risk," Deo warned. He said that an interest rate of 5.11 percent set during an 84-day long term refinance operation on Friday "reflects the tightest money-market conditions that most of us have ever experienced." Annunziata underscored a "desperate thirst for dollar liquidity in the eurozone market," and said a spike in the rate for one-month loans "suggests that whatever problems are lurking below the surface might be getting worse." The markets were clearly spooked by the impasse in Washington on a 700-billion-dollar bank rescue plan, which dashed hopes of an early agreement that would ease the financial turmoil. Commerzbank analyst Bernd Weidensteiner said that much of the fresh Fed funds being pumped into money markets would find its way back into US Treasury bills rather than being extended as credit, because banks sought the safest investments possible. "As a result, less money reaches the overall economy and the expansionary policy fails to deliver," he commented. "Some funds have come full-circle," Weidensteiner said, a situation known as a "liquidity trap." News that bank JPMorgan Chase had taken over struggling Washington Mutual " the second-biggest US savings and loan institution " for 1.9 billion dollars added to the pressures. "European policymakers are praying that the US bailout package will be passed soon," the UniCredit Markets economist Annunziata said. Economists Daniel Gros and Stefano Micossi, writing for the RGE Monitor of New York University professor Nouriel Roubini, warned that some European Union banks might also not be so safe as many believed. Under the headline of Money Markets Grind to a Virtual Halt, the Monitor said that now, "there is no real term funding markets except for central banks," meaning that interbank lending had seized up. Referring to a key interbank lending instrument, the Libor market, they said "Libor is meaningless" because it was used for unsecured lending, or lending without collateral guarantees. "And there is no unsecured lending," the publication said. Gros and Micossi added meanwhile that "some EU banks have become too big for any one European country to save while an official cross-border crisis management mechanism with ex ante burden sharing is not in place," they said. "The crucial problem on this side of the Atlantic is that the largest European banks have become not only too big to fail, but also too big to be saved."

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