[NYTr] Frustrated ECB promises banks infinite money at a discount

[All the News That Doesn't Fit]

sent by Gold Anti-Trust Action Committee - Dec 17, 2007
http://www.gata.org


Frustrated ECB promises banks infinite money at a discount


Financial Times - Dec 17, 2007
http://www.ft.com/cms/s/0/95b09512-acd2-11dc-b51b-0000779fd2ac.html


ECB Steps Up Fight to Safeguard Liquidity

By Ralph Atkins, Gillian, Krishna Guha

Emergency help for financial markets entered new territory on Monday
night as the European Central Bank announced that it would on Tuesday
offer unlimited funds at below-market interest rates in a special
operation to head off a year-end liquidity crisis.

The surprise move, which follows last week's co-ordinated barrage
of measures by the world's central banks to increase market liquidity,
suggests the ECB is still frustrated at the failure to ease market
tensions.

The measure was reminiscent of the ECB's operation on August 9, at
the start of the global credit squeeze. But that was for overnight
loans while the new offer is for two weeks.

Analysts warned that the measure risked increasing market volatility
and saw the central bank breaking new ground in helping out the
banking sector.

"This is basically Father Christmas to those who have access," said
Erik Nielsen, economist at Goldman Sachs. "They are bailing out
people who have not really adjusted their balance sheets to the new
reality."

But Julian Callow, economist at Barclays Capital in London, said
the funds injected would later be "mopped up" by the ECB, which was
"simply doing their job at being lender of last resort."

The ECB had already announced that Tuesday's regular weekly money
market operation would mature on January 4 -- covering the year-end
when financial institutions will be under pressure to show strong
liquidity on their books.

But on Monday night it said in addition that it would satisfy all
bids offering 4.21 per cent or more. Prior to the announcement, the
cost of borrowing two-week money had soared to 4.9 per cent but
fell sharply afterwards as the ECB's move in effect put a cap on
market interest rates.

The move could trigger a surge in demand for ECB liquidity. In last
week's regular seven-day auction, the ECB allocated E218.5 billion
at an average rate of 4.21 per cent -- the rate chosen as the cap
for today's operation.

The ECB offered little explanation for its move beyond saying it
was "fully consistent" with its aim of keeping rates close to its
main policy rate of 4 per cent.

The latest move underlines the limited impact of last week's
co-ordinated intervention, which included a new liquidity facility
at the US Federal Reserve.

The Fed held the first of its new credit auctions on Monday, offering
$20 billion in one-month loans in an effort to ease strains in the
term money market.

The Bank for International Settlements on Monday published a report
on the different money market operations that are used by central
banks -- the first such study that has ever been conducted by the
Basel-based group.

It refrained from drawing precise policy conclusions but it noted
that there is a striking variation in the techniques used.