ECB issues additional €61bn to struggling markets(2)

The European Central Bank has attempted to further calm the markets with a greater loan issuance today and it has been followed by the US Federal Reserve.

The European Central Bank has upped its efforts to inject liquidity into financial markets by lending a further €61 billion ($83 billion) to institutions over the weekend.

An ECB spokesperson said the aim of the issue was “to assure orderly conditions and create liquidity.”

After the US markets opened with further problems following the worldwide decline in stocks of recent days, the US Federal Reserve also decided to intervene again. According to a spokesman the Fed contributed $19 billion (€14 billion) followed by another $16 billion of repurchase agreements in an effort to provide the markets with more liquidity. The Fed had also provided the markets with $24 billion yesterday.

The move comes after the ECB provided €95 billion for the markets yesterday, in a highly unusual step, which surpassed the €69 billion issued after the terrorist attacks of 9/11.

With its latest contribution the ECB has also added more to the markets than it did in the days after the attack where it issued a further €40 billion.

The ECB said in a statement it had received bids totaling €110 billion today but it had decided to lend €61 billion more, after setting an average rate of 4.08 per cent, just above its main interest rate of 4 per cent.

This issue is a three-day offer at a variable rate allowing the bank to decide how much money to inject into markets. 62 banks bid on Friday compared with 49 on Thursday, according to UK newspaper Financial Times.

According to the FT the Bank of Japan has also issued funds to the market to help counteract the credit crunch. The BoJ provided Y1,000 billion ($8.5 billion) after its interest rate, the call rate, rose to 0.54 per cent against the bank’s 0.5 per cent overnight target.

The financial markets have been in turmoil in the last few days, after the decision by French bank BNP Paribas to freeze three funds exposed to the US sub-prime mortgage sector.

One source on a leveraged loan team at a leading bank, said: “I was surprised to see the intervention. They must be spooked by BNP, but I’m sure they have used their insight into other situations and this was not just to bail out BNP.”

The ongoing crisis in the debt markets has left an estimated €250 to 350 billion pipeline of unsyndicated leveraged loans. It is hoped that the deficiency of liquidity across the financial sector will be aided by central banks attempts to shore up the banking sector and the base rate.

However, most market participants are alarmed by the developments in recent days and some are reconsidering hopes that the debt markets will recover in September.