The European Central Bank was to turn on the liquidity taps to banks yesterday, offering unlimited funds at a below-market fixed rate as market unease over the US subprime mortgage crisis continues.
The ECB said in a statement that during the two-week market refinancing operation (MRO) beginning yesterday it would allow banks to borrow an unlimited amount of funds and would keep the rate at 4.21 percent, below the 4.9 percent market rate for similar operations over the past few days.
"Specifically, as a minimum the ECB will satisfy all bids at or above the weighted average rate of the MRO settled on Dec. 12, ie 4.21 percent," the bank said.
Since the US market for high-risk loans collapsed in August, central banks have been boosting liquidity in the banking sector to ensure that banks continue to extend credit to businesses.
On Dec. 12 the European, US and Swiss central banks said they would provide more than US$60 billion to money markets over longer periods and under easier-than-usual conditions to calm the markets.
The Wall Street Journal reported that this would be only the second time in the ECB's nine-year history that it would offer an unlimited amount of funds at a fixed rate. The first time was on Aug. 9 when financial markets first seized up as the US subprime mortgage market melted down.
The ECB announced last week that it would exceptionally extend the MRO for two weeks.
In its announcement on Monday, the ECB told banks they can have a nearly unlimited amount of funds at the below-market level of 4.21 percent through the end of the year, a delicate time for financial institutions which need to close their accounting books.
For its part, the Fed began an operation on Monday to inject US$20 billion into the market. The results of that effort were to become known yesterday.
In another planned move, the Fed is expected to inject another US$40 billion into the market in the coming days.
Markets worldwide have become increasingly jittery over the credit squeeze, the losses it has caused and its implications for the wider economy.
Wall Street shares fell sharply on Monday in the wake of a sea of red on European and Asian bourses.
"Wall Street remains concerned over the possibility of more huge writeoffs from global financial companies and the ramification those write-offs could have on the banks' ability to finance the global economic expansion," said Fred Dickson, strategist at DA Davidson & Co.
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