Credit strains linger, Pimco pleads for help

By Pedro Nicolaci da Costa

NEW YORK (Reuters) - Banks and businesses are still having trouble raising money, according to data on Thursday that reinforced the prospect that the year-long U.S. credit crisis will persist for the foreseeable future.

Bill Gross, the influential manager of the world's biggest bond fund, Pimco, called in his latest investment outlook for unprecedented government intervention, saying it was needed to avoid another damaging wave of asset sales.

Such concerns spilled over into the equity markets, where the Dow Jones industrial average dived nearly 350 points, its worst one-day drop in over two months.

In one encouraging sign, issuance of commercial paper, a form of debt used to raise short-term capital that has been hard hit by the turmoil, rose for a fourth straight week. Analysts said it was too early to tell whether this increase reflected a real improvement in conditions rather than seasonal adjustment quirks.

"We would need to see more of a continuation of this trend, for another month or so, before making any solid judgments," said John Canavan, market analyst at research company Stone & McCarthy in Princeton, New Jersey.

Other areas offered less hope. The interbank cost of borrowing three-month dollar and euro funds both edged higher, with dollar Libor reaching four-month highs, according to the British Bankers Association.

In the meantime, strong interest in the Federal Reserve's short-term funding auction suggested banks are still strapped for cash. Primary dealers submitted $45 billion of bids for the $25 billion of Treasury debt on offer.

GROSS' CATACLYSM

The crisis began when assets tied to real estate entered a free-fall led by declining home values. It has since spread, requiring trillions of dollars in liquidity injections from central banks to keep the financial system greased.

On Friday, U.S. regulators took over Integrity Bank, marking the 10th bank failure this year. In March, the Fed was forced to pony up $30 billion to prevent the collapse of investment bank Bear Stearns, which it says threatened the entire financial system.

Taken together, Thursday's developments painted a grim picture, captured colorfully in the missive from Pimco's Gross.

"This rarely observed systematic debt liquidation is what confronts the U.S. and perhaps even the global financial system at the current time," Gross wrote on Pimco's website. "Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami."

He called for the Treasury to take a more active role in literally buying up distressed assets to put a floor under the market, referencing the Great Depression-era Resolution Trust Corporation.

"If we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury," he said.

Underscoring the general reluctance to lend, U.S. banks' direct borrowing from the Fed hit another record in the latest week, Fed data showed.

Primary credit borrowings by banks from the Fed averaged a record $18.98 billion per day in the latest week, surpassing last week's average of $18.47 billion per day.

"There are still some concerns about credit availability. Banks' unwillingness to lend to each other remains elevated," said Kevin Nicholson, senior fixed-income strategist at Wachovia Securities in St. Louis.

Dallas Fed President Richard Fisher said credit markets were getting better, but added that the "healing process" had some way to go.

(Additional reporting by John Parry; Editing by Leslie Adler)