Lending between banks is at a standstill because banks fear other banks might fail and want guarantees that contracts will be respected. The freeze is strangling credit throughout the global economy.
A wave of emergency interest rate cuts, rescue packages and massive injections of capital into money markets in recent days, have all failed to assuage the panic.
On Thursday, the European Central Bank opened an unlimited cash lifeline for credit-starved institutions to be available “for as long as needed” and at least until Jan. 20 next year.
In addition, the European Central Bank said yesterday it had pumped more than US$93 billion into interbank money markets to get banks through the weekend.
The crisis of confidence in the markets and among lenders has been underpinned by increasingly pessimistic forecasts for the global economy.
In a biannual report on the world economy, the IMF forecast that the US would fall into recession this year, barely grow next year and risked performing even worse than expected given current uncertainty.
Also See: Japan to propose emergency fund for nations hobbled by financial crisis
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