http://www.ft.com/cms/s/a8c5829a-466e-11dc-a3be-0000779fd2ac.html ECB offers emergency funds to boost liquidity By Richard Milne in Frankfurt and Chris Flood in London Published: August 9 2007 12:59 | Last updated: August 9 2007 13:43 The European Central Bank took emergency action on Thursday to stabilise money markets amid broadening fears of a liquidity crunch. It injected â¬94.8bn as part of an unlimited cash offer to borrowers at its main lending rate of 4 per cent after overnight rates shot up to 4.7 per cent, their highest in nearly six years. âThis liquidity-providing fine-tuning operation aims to assure orderly conditions in the euro money market. The ECB intends to allot 100 percent of the bids it receives,â the central bank said when it called for bids. The highly unusual move, the biggest intervention by the central bank since the aftermath of the terrorist attacks in New York in 2001, caused rates to dip and led to speculation among some traders that other central banks - particularly the US Federal Reserve - may be planning to take similar measures. Earlier on Thursday BNP Paribas, the French bank, closed three investment funds because of a deterioration in the levels of liquidity. The French bank said in a statement that the decision to suspend Parvest Dynamic ABS, BNP Paribas ABS Euribor and BNP Paribas ABS Eonia funds followed the âcomplete evaporationâ of liquidity. The ECB has in public, like other central banks, tried to reassure markets that the current subprime-related problems are part of a normal correction in market conditions. In its monthly bulletin published on Thursday the ECB reiterated that âoverall financing conditions remain favourable, money and credit growth vigorous, and liquidity ampleâ. But it added that it stood ready to act to assure orderly conditions in money markets. But overnight dollar rates surged from 5.22 per cent on Wednesday to 5.86 per cent, the highest level since 2001. Overnight sterling rates hit 6.16 per cent and overnight euro deposit rates jumped to 4.70 per cent, also the highest since 2001. Even overnight yen rates rose, up from 50 basis points to 61 basis points. âIt doesnât matter where you look, thereâs huge pressure acorss money markets,â said one trader. Interest rate futures also jumped to near six-year highs with the UK rate rising from 5.85 per cent to 6.40 per cent while the dollar equivilent moved from 5.30 per cent to 5.80 per cent. Tensions eased slightly after the Budesbank denied rumours that it was holding emergency talks to discuss problems at West LB, the German state bank. Market speculation suggested the US Federal Reserve will follow the ECBâs lead in injecting liquidity into the system. âAlthough the day-to-day money market operations of the Fed have long ceased to be a focus of the market, it would not be surprising if the Fed was extra generous in providing liquidity today,â said Mark Chandler of Brown Brothers Harriman.
Fed injected 12 Billion today, too. Funny thing is the ECB is injecting liquidity in the light of the whole "we're going to hike rates next month!"