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ECB injects 120 billion euros into markets

Latest update : 2008-09-29

The European Central Bank has loaned 120 billion euros to eurozone banks to ease interbank tensions. Analysts are concerned about European banks' vulnerability in the financial crisis that has so far primarily hit the U.S.

The European Central Bank said Monday it had loaned eurozone banks 120 billion euros (172 billion dollars) in a special 38-day operation aimed at soothing extremely tense interbank money markets.
The ECB had said earlier in a statement that "the special term refinancing operation will be renewed at least until beyond the end of the year," amid increased pressure at the end of the third quarter.
"The ECB will continue to steer liquidity towards balanced conditions" in an attempt to bring interbank interest rates in line with the bank's own minimum rate, it added.
Commercial banks usually lend and borrow cash on interbank money markets but these have almost completely dried up since the US market for high-risk, or subprime, mortgages collapsed more than a year ago.
The ECB and other major central banks have thus been pumping hundreds of billions of dollars, euros, pounds and other currencies in the form of loans into such markets.
On Monday, the ECB also rolled over one-day dollar loans to eurozone banks, renewing that operation for a total amount of 30 billion dollars (20.8 billion euros).
The dollars were obtained from the US Federal Reserve through a reciprocal currency agreement known as a swap, and allow eurozone banks to obtain the US currency directly from the ECB.
Initially, the one-day loans were for 40 billion dollars, but the ECB reduced that amount last week, while extending other dollar loans to a period of one week.
"Injections of dollar liquidity by the ECB, Bank of England and Swiss National Bank have highlighted the sizeable dollar exposures among European banks," Citibank analysts wrote on Monday.
"We suspect that both the European economy and European financial system are more vulnerable than many realise," they added.
Major central banks agreed last week to inject billions more dollars into money markets that have been battered by the chronic crisis, with a focus on getting banks over the end of quarter period, when they seek to beef up their cash holdings.
Some analysts question whether the central bank moves will work however, saying that commercial lenders soak up the extra cash but still do not lend to each other or extend it as credit to businesses.
Rather, they may be using some of the funds to buy government treasury bills because they are presently considered one of the safest investments.


Date created : 2008-09-29