FRANKFURT - Central banks have regularly pumped cash into money markets since the financial crisis deteriorated in mid September, raising the question of what terms like 'liquidity' and 'refinancing' mean.
The explanation begins at an imaginary ABC bank where Mr. Smith has gotten a credit of 20,000 euros (27,000 dollars) to buy a car.
The bank has credited Smith's account and must support the loan with a cash reserve at the country's central bank in case it is not paid back.
In the 15-nation eurozone, banks must put two percent of a loan's value on deposit with the European Central Bank (ECB), in funds known as "central bank money," Bank of America economist Gilles Moec explained.
Deposits also allow banks to buy the bank notes they distribute to clients, he added.
The system of minimum reserves provides a safety net and allows central bankers to keep an eye on lending.
It is possible for ABC bank to find itself short of the cash needed to stock its reserve, if for example it has made many loans in a short period of time.
Normally, ABC would go to an interbank money market and borrow central bank money from another bank.
ABC bank has thus "refinanced" its central bank account, by obtaining "liquidities," or cash, from a bank that is often called a counterpart.
Exchanges on the interbank money market take place at rates that vary according to supply and demand and exist only as figures on paper, actual bank notes are not involved.
On a weekly basis, meanwhile, central banks carry out refinancing operations during which they loan cash to banks that need it, at what is called the reference rate, currently 3.75 percent in the eurozone.
Since the financial crisis erupted more than a year ago however, the interbank market has frozen up because banks have stopped lending to each other.
"Banks want to be sure they will have liquidity to face a situation of default by one or more of their counterparts," Moec explained. "They want to keep as much liquidity as they can."
Market borrowing rates have thus hit record levels and banks have found it hard to obtain the cash they need.
That is when central banks offer help though special "liquidity injections" that are limited in time and calculated to provide just as much cash as necessary.
Banks obtain central bank money in exchange for collateral, often government or corporate bonds that they own.
At the end of the specified period the money is paid back and withdrawn from circulation, though it can also be reinjected.
A danger of frozen money markets is that banks could go bankrupt if, for example, customers spooked by the financial crisis emptied their accounts.
Banks must also restrict credit when markets are stressed because they can not get the reserves to back up lending.
At that point, the "real economy," as opposed to the financial economy, that depends on credit for daily operations is squeezed in turn.
On Thursday, the ECB raised the amount of dollars it has been injecting on a daily basis to 100 billion dollars.
The amount is renewed, or rolled over, each day.
On Friday, commercial banks did not need all the cash available, taking up a little less than 94 billion dollars, which the ECB obtained from its US counterpart, the Federal Reserve, via a currency exchange known as a swap.
The agreement allows the ECB to provide dollars to eurozone banks that need to finance operations in the US currency.
Similar accords with other central banks have provided dollars to banks worldwide.
The money is loaned to banks for short periods of time, and since it remains within the central bank system, "it will not raise the money supply in any way and can't be inflationary," Moec said.
Currency injections, which can range from one day to six months in the case of ECB operations in euros, have nonetheless failed so far to keep interbank rates in line with benchmark lending levels and calm nervous markets.
"Trust among banks is so depleted that the interbank market remains virtually paralyzed," Citibank analyst Lewis Alexander said Friday.
New York University economics professor Nouriel Roubini called for "massive and unlimited provision of liquidity to solvent financial institutions."
On Wednesday, the ECB said it would offer unlimited funds in weekly loans to eurozone banks "for as long as needed."
Moec said the ECB sought to give banks "some breathing space, so that at least for three months or six months they know they have the liquidity they crave."