[NYTr] Central banks give biggest liquidity boost ever

[All the News That Doesn't Fit]

The Telegraph (UK) - Dec 20, 2007
http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=&xml=/money/2007/12/19/cnbanks219.xml


Central banks give biggest liquidity boost ever

By Ambrose Evans-Pritchard

The world's central banks have again resorted to shock tactics to
unfreeze the credit markets, flushing the global system with $530
billion (L263 billion) so far this week in the biggest injection
of liquidity ever recorded.

The European Central Bank alone lent over half a trillion dollars
(E349 billion) to lenders for two weeks in an unlimited auction.
The rate was set at just 4.21 percent, far below the market cost
of short-term money.

Marc Ostwald, an economist at Insinger de Beaufort, said: "It is a
serious signal that the ECB means to break the logjam and get banks
to lend again. We have reached a point of almost complete seizure
in the credit markets."

The sheer scale of lending suggests that last week's shock move by
five top central banks to calm the markets was not enough to restore
confidence. Spreads on the key money rates of Euribor and Libor
remained at extremely elevated levels.

"The ECB's unlimited liquidity is a sign of emergency. People who
think this move is just end-of-year housekeeping have lost touch
with reality," said Hans Redeker, currency chief at BNP Paribas.

"The ECB has had to take dramatic action because the co-ordination
last week did not have much effect. The bank underestimated the
damage already done in the financial market," he said.

In Britain lenders showed up tentatively to the Bank of England's
L10 billion auction of three-month funds, reassured that the "Northern
Rock-style" stigma of emergency borrowing has been removed. Bids
reached a total of L10.85 billion, starting at a rate of 5.36 percent
-- below the bank's base rate of 5.5 percent.

One bid reached as high as 6.6 percent, a sign that at least one
lender is struggling to raise money on the capital markets and may
be in difficulty. Sterling Libor is currently 22 basis points lower
at 6.38 percent.

"Clearly this is somebody who didn't have access to Libor at market
rates," said John Wraith, head of UK rates strategy at the Royal
Bank of Scotland.

Observers said the modest volume of bids at the Bank auction suggests
the levels of stress in the UK financial system are less than feared.
But it could mean that UK lenders are flocking instead to the ECB's
window in Frankfurt, where money is far cheaper.

The latest actions appear to have calmed one-month money markets
in Europe, but spreads on three-month lending have proved sticky.
Euribor is still trading at 4.82 percent, a huge premium to the
ECB's policy rate of 4 percent.

The US Federal Reserve will today release the results of its term
auction lending, which allows banks across the US to borrow on
easier conditions and provide mortgage securities as collateral.
The Fed is lending $40 billion over two weeks.