IMF calls for guarantees to unfreeze money markets

By Jamie McGeever and Simon Rabinovitch

LONDON/BEIJING (Reuters) - Central banks pumped huge amounts of short-term funds into paralyzed money markets on Friday as the world's attention turned to Washington where global finance leaders meet this weekend to discuss the deepening crisis.

Investors across all asset classes will look to Group of Seven finance ministers and central bankers, and International Monetary Fund for coordinated action to help arrest the panic that has frozen money markets and sent stock markets into a tailspin.

IMF chief Dominic Strauss-Kahn on Friday called for a temporary guarantee of all interbank deposits.

"This means not only retail bank deposits but probably also interbank and money market deposits, so that activity may restart in these key markets," Strauss-Kahn told a conference in Washington.

"Of course, such a step should be temporary and include safeguards such as heightened supervision and limits on deposit rates offered," he added.

Strauss-Kahn's comments followed another day of turmoil on global financial markets and virtual paralysis on money markets, which had prompted yet more liquidity provisions from monetary authorities around the world.

The European Central Bank and Bank of England injected a combined $132 billion of one-day and one-week dollar liquidity into the European banking system.

In Asia, Singapore cut interest rates for the first time since 2003 and the Bank of Japan injected a record 4.5 trillion yen ($45.5 billion) in same-day funding.

Investors dumped government bonds and scrambled for cash as insurer Yamato Life went bankrupt, selling that was also mirrored in European and U.S. government bond markets in the scramble for cash.

The Reserve Bank of Australia injected A$2.63 billion ($1.8 billion) into the banking system, adding about A$790 million more than the estimated need in an effort to ease funding pressures.

"With money markets disintegrating, the financial system is at risk. The deleveraging we thought should take place over years looks set to be brought about by dysfunctional funding markets in a matter of weeks." said Dresdner Kleinwort in a note to clients on Friday.

IN UNISON

Despite the myriad measures from individual central banks and governments, the deepening dislocation -- in equity, credit, interbank, fixed income and currency markets -- is increasing the clamor for coordinated action.

"Most euro zone governments have relied mostly on political promises of rescue if needed (but) we doubt stability will be restored until these promises are converted into concrete actions, preferably with an interbank guarantee," Goldman Sachs' European economists wrote in a note on Friday.

At the British Bankers Association's daily fixing of London interbank offered rates (Libor) on Friday, overnight sterling rates jumped, as dealers reported some UK banks faced a shortage of cash.