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Singapore/Frankfurt: European central banks joined their Asian counterparts in pumping more cash into paralysed money markets on Monday, but commercial banks preferred to hoard cash rather than lend to each other as the financial crisis spread in Europe.
With the end of the financial quarter compounding liquidity tensions, the European Central Bank (ECB) announced it would make an extra batch of 38-day funds available to euro zone banks and keep the extra cash in play until at least early 2009.
The Bank of England (BoE) injected £40 billion ($73.53 billion) of three-month funds yesterday to improve sterling market conditions after a weekend of bank failures in Europe and talks in the US 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, and 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 nationalisations in Europe suggested the year-old global credit crisis was far from over, even though US lawmakers were gearing up for a vote on the $700 billion fund to buy bad debt.
Financial group Fortis 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 nationalised mortgage lender Bradford & Bingley and sold its branches and deposits to Spanish bank Santander.
German mortgage lender Hypo Real Estate struck a last-minute deal with a group of banks for credit to resolve a refinancing squeeze while Iceland's government bought a 75 per cent stake to take control of Glitnir bank whose funding position deteriorated in recent days.
"One sees now that not only American but also European banks are affected and that the crisis is after all global," said Carsten Klude, strategist at MM Warburg.
"A rescue plan worth $700 billion is simply not enough to overcome the crisis for the foreseeable future. If anything, all the real economy problems will escalate as a result in the foreseeable future."
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.
ECB tender
In another liquidity first, the ECB called for bids in a special five-and-a-half week tender - covering the end of the quarter - and said it would act as needed to keep overnight rates near its 4.25 per cent benchmark.
"The ECB will continue to steer liquidity towards balanced conditions in a way which is consistent with the objective to keep very short term rates close to the minimum bid rate," the ECB said.
Euro zone banks deposited a record 28 billion euros at the ECB overnight as of Sunday rather than lending it out to other institutions, highlighting mistrust over other banks' soundness.
ECB Governing Council member Nout Wellink said he would have expected bank share prices to rise in the wake of a government rescue, rather than to fall as was the case. "Common sense tells me that if the governments of three financially solid countries rescue a bank, that share prices should go up... Markets to some extent have lost their sense of direction," he said on the sidelines of a meeting.
Extra short-term liquidity for banks
Frankfurt (AP) Central banks around the world have said they will provide extra short-term liquidity to banks that have been fearful of lending to each other amid turmoil that has seen major financial institutions go under.
The Bank of Canada said it and the Fed had agreed to expand their swap facility to $30 billion from the $10 billion announced less than two weeks ago.
The Bank of England has said it is "increasing the size of its swap facility with the Federal Reserve to allow the provision of up to $80 billion in dollar liquidity, should that be needed," from its current $40 billion.
The Bank of Japan also said it would increase its swap to $120 billion from $60 billion; the Swiss National Bank said it would also double its swap line to $60 billion from $30 billion.
The Reserve Bank of Australia said it would increase its swap to $20 billion.
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