EU injects billions

Central bankers around the world waded in to support the global banking system again today as stock markets plunged on fears of a massive credit crunch.

On Wall Street, the Dow Jones gave up as much as 200 points in early trading. It later made good some of those losses on news that the US Federal Reserve had injected a fresh $35 billion (£17 billion) into the money markets. Globally, central banks pumped some $120 billion of extra liquidity into financial markets in efforts to avoid an all-out collapse.

Nevertheless, almost £56 billion was wiped from the value of London’s largest companies. The FTSE 100 Index fell more than 3.7 per cent - its biggest percentage decline in more than four years, as the crisis in the American sub-prime mortgage market spilled into other classes of assets.

The FTSE 100 closed 232.9 points lower at 6038.3 - its lowest close since March last year.

The FTSE 250, which includes smaller companies and is often seen as a better indication of the state of the UK economy, was 303.6 points lower at 10,908.5.

In an effort to calm the markets it is understood that the US Federal Reserve injected $19 billion into the financial system in a first operation, which was followed by a further $16 billion in a second. Yesterday it provided an estimated $24 billion (£12 billion). The Central Bank of Canada also intervened in money markets.

Those actions followed the lead of the European Central Bank which earlier today lent €61 billion (£41.3 billion) to the eurozone banking system, in addition to the €95 billion it provided yesterday to 49 banks in unprecedented emergency action by the Frankfurt-based institution. It was the highest level of support since that provided in the aftermarth of the 9/11 terrorist attacks on America.

The ECB's move takes the form of a series of 3-day loans, which need to be repaid on Monday.

The latest ECB injection brings to more than £135 billion the amount central bankers have pumped into the system in the past 24 hours. Requests by banks for a further €49 billion of ECB loans were left unsatisfied.

Overnight, the Bank of Japan injected the equivalent of £4.1 billion, and the Reserve Bank of Australia pumped in A$4.95 billion (£2.1 billion).

But these failed to stop panic selling around the world. London's blue chip shares continued to fall sharply today. By mid afternoon the FTSE 100 index, which had fallen more than 200 points, was 190 lower in heavy trading.

France's CAC-40 index was down 1.21 per cent, at 5,559.68. Germany's DAX index was down 1.29 per cent at 7,357.58.

The dollar was trading at $2.02 to the pound, from $2.0298 last night.

The ECB's latest injection came amid mounting global credit jitters sparked a scramble for cash by financial institutions.

The ECB said today that 62 parties had made bids for €110 billion of its funds at the morning auction. The minimum interest rate was set at 4.0 per cent, with those parties bidding the highest rate served first. The average interest rate was 4.08 per cent.

The Bank said:"This liquidity, providing a fine tuning operation, follows up on the operation conducted yesterday and aims to assure orderly conditions in the euro money market.”

The ECB actions have outstripped even the scale of its intervention on the day after the September 11, 2001, terrorist strikes on the US, when it pumped in €69 billion of liquidity to stabilise credit markets.

Fears of weakness in the US sub-prime mortgages market were underlined as BNP Paribas, the French bank, yesterday said it was freezing €1.6 billion of funds on concerns over their exposure to the sub-prime mortgage market.

Before the ECB's initial move the interest rate for eurozone banks seeking to borrow money from each other overnight spiked to 4.62 per cent — its highest since the aftermath of the 9/11 attacks and far above the central bank’s 4 per cent target level.

The surge in overnight rates was the latest sign of the strains on financial institutions from the worsening world squeeze on credit. It came as leading banks struggled to secure finance to cover more than $300 billion (£148 billion) of corporate loans stockpiled on their balance sheets, and resorted to tapping the overnight money markets for funds.

"There appears to be a dash for cash both in dollars and in euros," Nick Parsons, head of strategy at nabCapital, said. "Because liquidity in the market is drying up, and because financing is also becoming difficult, it seems that investors who need to finance holdings of securities are not being able to draw on credit facilities and instead are having to finance off the cash market. That’s putting up rates for cash."

Those pressures were also evident in London money markets as overnight dollar lending rates leapt to 5.45 per cent, also a six-year high, having begun rising late on Wednesday in New York trading.

The growing credit crisis is also showing signs of impacting the race to buy ABN Amro, the Dutch bank.

Fortis, the Belgium bank that is part of Royal Bank of Scotland's bidding consortium, has admitted its plans to sell €2 billion (£1.3 billion) worth of bonds to help finance the takeover of the Dutch bank ABN Amro may be delayed.