Central banks dish out more cash as money markets freeze

By Marc Jones and Wayne Cole

FRANKFURT/SYDNEY (Reuters) - Central banks across the world scrambled to meet desperate demand for cash on Friday, with Europe's big three offering billions of one-week dollars for the first time to break a quarter-end money market logjam.

As the financial crisis went from bad to worse, the European Central Bank, the Bank of England and Swiss National Bank collectively put up $74 billion of one week money.

Demand from cash-hungry banks, particularly for the ECB cash, was hefty as lending between banks on money markets remained virtually paralyzed.

"There is no term lending of note between counterparties. Any term funding there is coming from the central banks," said Meyrick Chapman, rates strategist at UBS.

In Asian time, the central banks of Japan, Australia and South Korea also pumped in cash to lubricate their markets.

As negotiations over an unprecedented $700 billion U.S. bailout faltered, news that Washington Mutual, the largest U.S. savings and loan bank, was taken over by authorities and its deposits auctioned off only added to the thirst for liquidity.

The key three-month Euribor rate jumped to the highest level since early 1995, hitting 5.142 percent.

The interbank cost of borrowing 3-month dollars was broadly unchanged, according to the British Bankers Association's latest daily fixing.

But the spread of three-month London interbank offered rates over OIS rates -- which expresses the three-month premium paid over anticipated central bank rates and is seen as a gauge of banks' willingness to lend to each other -- hit a record high 202 basis points from Thursday's 197.

Stress was exacerbated by the looming quarter-end. Any three-month lending will then mature over the Christmas period, when markets are either closed or highly illiquid.

"These operations are designed to address funding pressures over quarter-end," said a statement from the Federal Reserve, which expanded dollar swaps facilities with other central banks.

"Central banks continue to work together closely and are prepared to take further steps as needed to address the ongoing pressures in funding markets."

HIGH DEMAND

The ECB's one-week dollar tender was swamped with demand -- the $35 billion attracted bids totaling $82.495 billion. But only just over half of the SNB's $9 billion was taken up.

The Bank of England received bids worth 1.06 times the amount on offer in its one-week repo of $30 billion -- the first time UK demand for dollars has exceeded the amount on offer.