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Fed joins central banks to stem collapse.
Fri Aug 10, 2007 13:59
 

 
Fed joins central banks to stem collapse.

Fed Joins Banks Adding Cash to Stem Credit Collapse (Update1)

By Christian Vits and Scott Lanman

Aug. 10 (Bloomberg) -- The Federal Reserve joined the European Central Bank and policy makers in Asia to add temporary cash to the banking system, aiming to stem a collapse in credit markets as lenders try to protect themselves against losses.

The Fed said in Washington it is providing reserves to ``facilitate the orderly functioning'' of markets, in a statement unprecedented since the aftermath of the Sept. 11, 2001, terrorist attacks. The European Central Bank loaned 61.05 billion euros ($83.6 billion), keeping most of yesterday's record injection of funds in the system.

``Central banks in this case have acted correctly, including the ECB and the Fed,'' said Davide Stroppa, an economist at UniCredit Banca Mobiliare in Milan. ``The intention was to calm the concerns of the markets and to ensure the correct functioning of the monetary and credit markets.''

Central banks in Japan and Australia also added funds as money-market rates rose across the world. The subprime crisis is spreading after international investors in the past year piled into the U.S. market for debt backed by mortgages.

In the U.S., the federal funds rate opened at 6 percent, the highest in six years. The rate slipped to 5.375 percent after the New York Fed said it purchased $19 billion of mortgage-backed securities.

The Fed said in its unscheduled statement that direct loans through its discount window are available ``as always.''

`Very Severe'

``This happens only during a crisis, so this is certainly an indication that funding problems in the market now are very severe,'' said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. ``This could be all it takes to stabilize market conditions here.''

Overnight euro rates again rose as high as 4.27 percent today, compared with the ECB's benchmark rate of 4 percent.

The ECB's action ``aims to assure orderly conditions in the euro money market,'' the Frankfurt-based ECB said today. Yesterday, the bank loaned an unprecedented 94.8 billion euros to assuage a credit crunch. Banks pay back that money today.

``When risk aversion boils over it's clear that demand for liquidity will rise,'' said Joerg Kraemer, chief economist at Commerzbank AG in Frankfurt. ``The ECB has used its tools in a good way to calm the situation.''

The BOJ added 1 trillion yen ($8.5 billion) today and the Reserve Bank of Australia lent $4.2 billion, the most in more than three years. The Fed added $24 billion in temporary reserves yesterday, the most since April. Central banks in Canada, Norway and Switzerland also injected money into the financial system and countries including Denmark, Indonesia and South Korea said they're ready to provide cash.

BNP's Funds

BNP Paribas yesterday stopped investors withdrawing from funds with assets totaling 2 billion euros because it couldn't find prices to value their holdings after the sell-off in credit markets. Default rates on home loans to people with poor credit, known as subprime mortgages, are at a 10-year high and American Home Mortgage Investment Corp. this week became the second- biggest U.S. home lender to file for bankruptcy.

Countrywide Financial Corp., the biggest U.S. mortgage lender, today said it faces ``unprecedented disruptions'' that may crimp profit. Countrywide won't be able to sell as many of its loans as expected because investor demand has dried up, the Calabasas, California-based company said. NIBC Bank NV in the Netherlands posted losses from U.S. credit investments.

`Spreading' Impact

``The effect of U.S. subprime loans is spreading to financial markets around the world,'' said Hiroko Ota, Japan's minister in charge of economic and fiscal policy. ``We need to carefully monitor how this will affect the economy.''

Stocks declined worldwide today and U.S. index futures retreated as concern increased that the widening credit crunch may hurt economic growth and earnings. The Morgan Stanley Capital International World Index lost 1.4 percent to 1533.05, while Standard & Poor's 500 Index futures expiring in September sank 17.9 to 1440 at 12:35 p.m. in London.

Today's operation by the ECB ``means there is a lot of speculative demand for cash left in the market,'' said Lena Komileva, an economist at Tullet Prebon in London, in a note to investors. While the ECB ``appears to have successfully stabilized conditions,'' the chances are ``that ECB intervention in the money market becomes a daily event.''

To contact the reporter on this story: Christian Vits in Frankfurt cvits@bloomberg.net Scott Lanman in Washington slanman@bloomberg.net

Last Updated: August 10, 2007 10:02 EDT

http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=ah7K.eFz9xiU

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