Central banks move to calm panicky money markets

By Randall Palmer and Stella Dawson

OTTAWA/FRANKFURT (Reuters) - Major central banks swept in to calm credit markets spooked by mounting losses on Thursday, with the European Central Bank injecting record amounts of cash to prevent a financial system seizure.

U.S. President George W. Bush also sought to calm fears that a credit squeeze would shake economic growth, telling a news conference both the global and U.S. economy were strong.

"I'm told there is enough liquidity in the system to enable markets to correct," Bush said.

The ECB pumped a record 94.8 billion euros ($130.6 billion) into Europe's money markets after France's biggest listed bank, BNP Paribas (BNPP.PA), froze withdrawals from three funds hurt by problems in the U.S. subprime mortgage market.

BNP's action made European banks fearful of how far U.S. subprime credit problems had reached and they essentially stopped providing short-term funds to one another, sparking a scramble for cash and forcing the central bank to step in.

After North American markets opened, the Bank of Canada said it was in contact with other central banks on the global situation and stood ready to add money as needed.

The Fed and the Bank of Canada both pumped money into financial systems through regular operations aimed at bringing benchmark overnight interest rates back to target.

The Fed injected $24 billion and the Bank of Canada C$1.64 billion ($1.55 billion). While the operations were larger than normal, analysts said they did not amount to an emergency injection of liquidity.

"The important thing to know is that we add reserves to the (U.S.) banking system the vast majority of business days in substantial volume," Minneapolis Federal Reserve Bank President Gary Stern told a gathering of local business people in Billings, Montana.

Michael Darda, chief economist at MKM Partners in Greenwich, Connecticut, said the Fed's operation was a normal response to bring the overnight federal funds rate, which was trading at 5.5 percent, back toward its 5.25 percent target. The rate retreated to 5.375 percent but returned to 5.5 percent late in the day.

"It's a mini-panic, and we are seeing demand for short-term credit," he said. "We are not seeing a so-called 'credit crunch' in the U.S. money market."

MARKETS SPOOKED

Nonetheless, financial markets were spooked.

U.S. interest rate swaps, a measure of market risk appetite, widened sharply. Stocks fell and investors piled into the safety of bonds, pushing down yields on U.S. Treasuries and European government debt.

In the United States, the blue-chip Dow Jones industrial average .DJI closed down 387 points, or 2.8 percent.