ECB moves to add liquidity to market By MATT MOORE, AP Business Writer

ECB moves to add liquidity to market By MATT MOORE, AP Business Writer
55 minutes ago



FRANKFURT, Germany - The European Central Bank loaned nearly 95 billion euros ($130.81 billion) in overnight funds to banks at a bargain rate of 4 percent on Thursday, putting more cash into a global financial system jolted by the collapse of the U.S. subprime mortgage market.

ADVERTISEMENT


Analysts and economists were surprised by the move, with some seeing it as evidence that the problems in subprime lending are spilling into the general economy and others as a case of the European Central Bank stepping in where the U.S. Federal Reserve Bank has not.

"The ECB tender vs. Fed inaction reflects differences in U.S. and European approaches to managing economies," said Peter Morici, an economics professor at the University of Maryland.

The European Central Bank, which controls monetary policy for Germany, France and 11 other nations in the euro zone, said it allocated 94.8 billion euros in the one-day quick tender to ensure orderly market conditions. Forty-nine bidders took part in the tender.

The ECB action came after French bank BNP Paribas SA announced the suspension of three asset-backed securities funds, saying it could not value them accurately. That had sent stocks lower in Europe and the United States as investors looked for safer havens such as Treasurys.

In the United States, the Federal Reserve Bank of New York added $24 billion of temporary reserves to the banking system through two regular market operations, a spokesman said. The U.S. Treasury Department said it "continues to monitor markets and remains vigilant."

The most recent repurchase agreement was on Wednesday, the day after the Fed held its key interest rate steady at 5.25 percent, and had added $8.75 billion in temporary reserves.

"Today's events show that either the Fed committed a large policy error on Tuesday, or that both the Fed and the ECB are themselves more in the dark on the problems that lie underneath the surface than are investors in the financial markets," Tony Crescenzi of Miller Tabak said in a research note.

"While the Fed and the ECB may not have the providence to see all problems that exist, it should at the very least have a greater sense about conditions in the markets it controls — the money market and the credit markets more generally — and of conditions in the banking system."

The Fed met Tuesday to discuss monetary policy and announced after the meeting that inflation, not credit problems, remained its major concern.

The ECB's move shows their difference in approach, analysts said.

"Europeans are inherently more activist, but the ECB is taking a big risk. Efforts to prop up markets can fail and actually create a crisis in confidence," Morici said. "The tender offer may calm markets or it may aggravate them. It is a risky business."

In overnight trading, analysts said, the euro rates rose as high as 4.7 percent — a sign that wary banks were pulling back on lending in general.

Defaults on subprime loans, or those made to people with poor credit, have climbed sharply in the United States in recent months and have triggered concern about the impact on credit markets worldwide. But until the past few weeks, most of the banks and companies affected were in the U.S.

"There is definitely a liquidity crunch going on," said Andrew Wilkison of Interactive Brokers in Greenwich, Connecticut. "But where it is surfacing is unusual. I don't think many investors expected it to turn up from the corners of the Rhine to central Paris."

BNP Paribas said it was suspending three funds worth a total of 2 billion euros ($2.75 billion): Parvest Dynamic ABS, BNP Paribas ABS Euribor and BNP Paribas ABS Eonia.

"The complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly regardless of their quality or credit rating," BNP Paribas said in a statement.

That likely forced the ECB to act, Wilkison said.

"That tender was massive," he said. "It was a third larger than the 9-11 cash offering — 69.3 billion euros ($95.14 billion) at the time. This is no small move."

BNP's announcement came on the heels of banks in Germany issuing similar concerns.

WestLB Mellon Asset Management, the asset management joint venture of German state bank WestLB AG and The Bank of New York Mellon Corp., suspended redemptions this week from its asset-backed securities ABS Fund, which is part of the West LB Mellon Compass Fund.

WestLB AG denied speculation that it is facing a fund liquidity problem.

Other companies, including Union Investment Asset Management, a German mutual fund manager, and Frankfurt Trust, a unit of BHF-Bank, have also halted redemptions.

"Securitized assets that have underpinnings in the U.S. subprime market may now be difficult to put a price tag on given market sentiment — as there is still lingering uncertainty whether the meltdown has greater knock-on effects down the line," said Cubillas Ding, a senior analyst at Celent.

BNP's announcement jarred stock markets already worried about problems among subprime borrowers. Bonds rose sharply as investors sought the relative safety of Treasurys.

___

AP Economics Writer Jeannine Aversa in Washington and AP Business Writer Tim Paradis in New York contributed to this report.