GLOBAL ECONOMY WEEKAHEAD-Year-end Libor to test liquidity plan

WASHINGTON Dec 16 (Reuters) - The best early gauge of whether central bankers are succeeding in keeping a credit crunch from crippling the global economy is how much banks charge each other to borrow money through the end of the year.

Unless interbank interest rates fall after central banks in Europe and the United States auction as much as $64 billion into the financial system in the week ahead, there may be more hand-wringing than bell-ringing heading into the new year as banks scramble for cash to meet their liquidity needs.

Monetary policy-makers in Europe, Canada and the United States banded together last week to try to ease the year-end cash crunch as problems that began with failing U.S. subprime mortgage loans have paralyzed parts of the financial sector.

As panicky investors and lenders struggled to figure out who held the bad mortgage debt, banks grew leery of lending to one another, clogging up financial markets and threatening to stall global economic growth.

Perhaps the biggest manifestation of that bank distrust is the London interbank offered rate, or what banks charge each other for short-term borrowing. High Libor rates suggest banks are reluctant to part with their cash.

On Friday, just two days after major central banks announced their joint effort, the rate to borrow dollars for two weeks -- long enough to satisfy year-end financing needs -- spiked to a three-month high. The Libor two-week euro rate hit its highest mark in 6-1/2 years.

The U.S. Federal Reserve will auction $20 billion on Monday and again on Thursday. The European Central Bank will hold auctions on the same days, with up to $20 billion in funding available while the Swiss National Bank is offering $4 billion in its auction on Monday.

If the auctions go well, that should boost banks' confidence and help push down the lofty Libor rates. But analysts cautioned that the auctions were a small first step in a crisis that has already cost banks tens of billions of dollars.

"The concept is right, it's just a question of size matters," said Andrew Busch, global foreign exchange strategist with BMO Capital Markets. "Twenty or forty billion (dollars) is not going to be enough."

CHEAP AND ANONYMOUS

Michael Feroli, an economist with JPMorgan, said the interest rate set at Monday's Fed auction will be a key test of whether the central banks' efforts can unstick markets.

The Fed has set a minimum bid rate of 4.17 percent. That is well below the 4.75 percent discount rate the U.S. central bank charges on direct loans to banks, so Feroli expects plenty of bidders.

Banks can submit bids for up to $2 billion. The Fed will accept those with the highest interest rate first and go down the scale until the money is gone. Feroli expects the lowest accepted bid to be about 0.4 percentage point above the minimum rate, putting it somewhere around 4.6 percent.

"If it clears at something above the discount rate, that's probably a bad sign," Feroli said. "It tells you there's a lot of stigma that's preventing banks from" using the borrowing tool.

Indeed, central banks in Europe and the United States have had little success encouraging banks to use the so-called discount window to bring cash to frozen markets because banks fear it will send a signal that they are in trouble.

"Banks are afraid that if they go to the discount window, other people will see it, and they may get some cheap money ... but they end up paying a ton more for everything else because people are scared of what's going on," said Harvard University professor Kenneth Rogoff.

"All of the central banks have been thoroughly frustrated by their efforts to relieve the credit crunch through the discount window," he added. "They've all done it in different ways. The fact is, nothing worked. It did not relieve the credit squeeze."

Goldman Sachs economist Jan Hatzius said the central banks' latest efforts may help mitigate a short-term cash crunch, but cannot fix the deeper problem of strains on banks' balance sheets.

On Friday, Citigroup (C.N) announced it would move $49 billion in assets whose market value has plummeted onto its balance sheet, which may constrain its lending.

"Banks are under pressure because they are seeing unplanned balance sheet growth because of the inhospitality of the capital markets, and because they are having to recognize losses on risky mortgages," Hatzius said in a note to clients.

"This combination is likely to restrain bank lending going forward, even if their access to liquidity improves," he said.

If loans to consumers and companies dry up, it could prove disastrous for a global economy already wobbling under the weight of the U.S. housing mess and stubbornly high inflation.

The Labor Department said on Friday that the U.S. consumer price index jumped 0.8 percent in November -- the biggest gain since September 2005 -- as energy costs leaped 5.7 percent. (Reporting by Emily Kaiser; editing by Gary Crosse)