September 29, 2008 / 6:23 AM / 9 years ago

Central banks redouble efforts to save bank system

<p>An outside view shows the Euro sculpture in front of the headquarters of the European Central Bank (ECB) in Frankfurt September 18, 2008. REUTERS/Alex Grimm</p>

WASHINGTON/FRANKFURT (Reuters) - The world’s central banks redoubled their efforts on Monday to revive the paralyzed global financial system through massive injections of cash.

The Federal Reserve announced a $330 billion expansion of arrangements to boost U.S. dollar liquidity throughout the global financial system to counteract a world financial crisis emanating from last year’s mortgage meltdown in the United States.

The action increases the reciprocal swap lines with the European Central Bank and eight other central banks to $620 billion from $290 billion previously, the Fed said in a statement.

The announcement came after European and Asian central banks had already been busy pumping more money into sclerotic world banking systems on Monday, in an effort to persuade financial firms to stop hoarding cash, which threatens to bring slow the global economy to a halt.

U.S. lawmakers were also preparing to vote on a $700 billion financial bailout plan.

“They are throwing billions around, but things seem to be getting worse,” said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey. “There’s a monster amount of fear out there. This is global contagion, it’s no longer just the United States.”

The efforts also show the heightened tensions in interbank lending as the approaching end of the financial quarter compounds the scramble for cash.

Global money markets remained under severe stress, and the world’s financial system appeared to be edging closer to the brink of collapse by the day. Authorities in Europe and the United States struggled to keep banks afloat through injections of cash, nationalizations and mergers of necessity.

London interbank offered rates for three-month euro funds and the premium for borrowing euros over anticipated official policy rates rose to their highest ever since the currency was launched almost a decade ago.

The Fed refrained from open market operations during the early part of the U.S. trading day, but said it would expand efforts to head off a possible year-end cash crunch at financial institutions.


The European Central Bank lent banks a massive 120 billion euros of 38-day funds in an auction, filling all but 15 percent of their bids, and promised to keep the extra cash in play until at least early 2009.

The Bank of England injected 40 billion pounds ($73.53 billion) of three-month funds on Monday to improve sterling market conditions after a weekend of bank failures in Europe and talks in the United States to seal a $700 billion bailout.

The Bank of Japan added 1.5 trillion yen ($14.2 billion) to its banking system, the ninth consecutive day it pumped in cash, before adding another 400 billion yen on a spot basis. The Reserve Bank of Australia added A$2.7 billion ($2.2 billion).

But the interbank cost of borrowing dollars, euros or sterling for three months rose as a string of bank nationalizations in Europe suggested the year-old global credit crisis was far from over.

Financial group Fortis FOR.BR was forced to accept an 11.2 billion euro ($16.4 billion) injection by the governments of Belgium, the Netherlands and Luxembourg after talks with ECB President Jean-Claude Trichet to prevent financial contagion engulfing one of Europe’s top 20 banks.

In Britain, the government nationalized mortgage lender Bradford & Bingley BB.L and sold its branches and deposits to Spanish bank Santander (SAN.MC).

German mortgage lender Hypo Real Estate HRXG.DE struck a last-minute deal with a group of banks for credit to resolve a refinancing squeeze.

Meanwhile, Iceland’s government bought a 75 percent stake to take control of Glitnir bank GLB.IC, whose funding position deteriorated in recent days.

In the United States, Citigroup Inc (C.N) will buy the banking operations of Wachovia Corp WB.N, which succumbed to the worldwide credit crisis, in a deal assisted by the Federal Deposit Insurance Corp.

But the precarious state of the financial system left analysts wondering whether any bailout would be big enough.

Once a byword for safety and liquidity, the short-term lending market in which banks lend to each other has repeatedly seized up during the financial crisis because of increasing worries over the creditworthiness of borrowers.

The U.S. Treasury said it would sell $140 billion worth of cash management bills in the coming days under a supplementary financing program for the Federal Reserve. The program was set up so the Treasury can borrow money on behalf of the Federal Reserve to expand the Fed’s depleted balance sheet.

Additional reporting Jan Dahinten, Kevin Yao in SINGAPORE and Wayne Cole in SYDNEY, Jamie McGeever in London, Steven C. Johnson, Burton Frierson in New York; editing by Gary Crosse

Our Standards:The Thomson Reuters Trust Principles.
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