ECB pumps in extra €170bn

By Ralph Atkins in Frankfurt

Published: December 18 2007 11:38 | Last updated: December 18 2007 11:38

Emergency help for financial markets has entered new territory with the European Central Bank pumping-in almost €170bn extra liquidity at below market interest rates in a special operation to head off a year-end liquidity crisis.

The surprise move, which followed last week’s co-ordinated barrage of measures by the world’s central banks to increase market liquidity, suggested the ECB was still frustrated at the failure to ease financial market tensions.

Late on Monday, the ECB announced that it would offer unlimited funds on a two-week basis at an interest rate of 4.21 per cent – significantly below the market rate before its statement. On Tuesday, it confirmed some €348.6bn - the largest ever for an ECB money market - had been allotted, compared with the €180.5bn it had estimated would be needed in normal circumstances.

The ECB move was reminiscent of its operation on August 9, during the earlier stages of the credit squeeze. But that was only for overnight loans.

“This is basically Father Christmas to those who have access,” said Erik Nielsen, economist at Goldman Sachs. “They are bailing out people who have not really adjusted their balance sheets to the new reality.” But Julian Callow, economist at Barclays Capital in London, said the ECB was “simply doing their job at being lender of last resort”.

The ECB had announced that Tuesday’s weekly money market operation would mature on January 4 – covering the year-end when banks will be under pressure to secure a strong liquidity position. Prior to the announcement, the cost of borrowing two-week money hit 4.9 per cent but it fell sharply afterwards as the ECB move in effect put a cap on market interest rate. The ECB said the move was “fully consistent” with its aim of keeping interest rates close to its main policy rate of 4 per cent.

The latest move underlines the limited impact of last week’s co-ordinated central bank intervention and highlights continued operational differences between the ECB and the more incremental Fed and Bank of England. A report by the Bank for International Settlements on Monday revealed the striking variation in money market operations used by central banks.