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ECB fires fresh rounds in fight against international financial crisis

The ECB's first six-day loans under the new regime generated requests for 24.68 billion euros (33.52 billion dollars) from 99 banks, a statement said, a relatively restrained response compared with banks' recent demands for cash.

An ECB statement late on Wednesday had announced unlimited weekly euro loans at a new benchmark rate of 3.75 percent that resulted from an exceptional joint central bank intervention on Wednesday aimed at softening an impending economic downturn.

The ECB will ‘satisfy all demand of counterparties, i.e. full allotment, for refinancing at the main refinancing rate of 3.75 percent,’ it said.

Refinancing operations take place at regular intervals and allow commercial banks to maintain minimum reserve requirements, meaning they have cash to back up lending operations.

An ECB spokesman told AFP that the last time the bank had resorted to such extraordinary measures was when the international financial crisis erupted in August 2007.

The practice will continue ‘for as long as needed,’ and at least until January 20, 2009, the central bank's statement said.

That would tide commercial banks over a crunch period in late December when they square their year-end books.

In another moved aimed at soothing extreme tension on crucial money markets, the ECB pumped 100 billion dollars (74 billion euros) back into them in one-day loans on Thursday, doubling the amount offered just two days earlier.

Money markets determine the availability of credit for hundreds of millions of people around the globe, from managers trying to fund businesses to families and students seeking personal loans.

Commercial banks generally lend and borrow cash from each other on interbank markets but these have dried up since the US market for high-risk, or subprime, mortgages collapsed more than a year ago.

The ECB decision to make one-week euro loans of unlimited amounts was accompanied by another key move aimed at calming the credit markets.

Commercial banks will now pay less for ECB overnight euro loans they can get at any time, while the rate paid to them for funds deposited with the central bank will remain the same.

The second rate would normally have fallen when the benchmark lending rate was cut on Wednesday from 4.25 percent

For Commerzbank analyst Michael Schubert, the new measures ‘will further stabilise short-term rates’ on the credit markets.

‘However, it remains to be seen whether this will help to revive turnover,’ Schubert added.

He felt the changes would increase commercial bank's incentive to use ECB facilities instead of borrowing and lending between themselves.

But Bank of America economist Gilles Moec said: ‘The ECB has just taken decisive steps to unclog the interbank market.’

While less spectacular than Wednesday's coordinated rate cuts, they ‘could prove key to a gradual improvement in money market conditions,’ Moec added.

The reform in lending procedures meant that ‘the effective average main refinancing interest rate applied by the ECB on eurozone banks’ actually fell by 1.24 percentage points, according to his calculations.

That was because banks which had bid for ECB funds recently had paid up to 4.99 percent for the money, whereas they would now be charged 3.75 percent.

‘Turning around the interbank market and making banks lend again to each other will probably be a gradual process, given the current intensity of stress,’ Moec said.

‘However, the ECB has now gone much beyond its ‘liquidity injection only' approach to the crisis.’