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    ECB renews one-day loans of $50 bln, siphons off euros

    AFP
    02.10.2008 - 16:58 | Son Güncelleme: 02.10.2008 - 16:58

    The European Central Bank (ECB) renewed on Thursday one-day loans of $50 billion (35 billion euros), in what has become a regular effort to keep cash flowing on distressed interbank money markets.

    Demand for the funds remained strong, with 55 banks requesting a total of more than 67 billion euros, and paying 2.75 percent for what was on offer, an ECB statement indicated.

    In a separate operation, the ECB said later that it would siphon up to 200 billion euros (280 billion euros) in surplus cash from eurozone money markets now that the end of the third quarter had passed.

    A loan of  $50 billion on Wednesday had been met with strong demand, and banks had sought a total of $70.927 billion, while paying a rate of 3.25 percent for the funds that were available.

    The euro withdrawal on Thursday would be made with the ECB offering its benchmark interest rate of 4.25 percent for funds it has calculated the banks no longer need.

    A similar operation on Wednesday allowed the bank to siphon off 173 billion euros, somewhat less than expected.

    Money markets had been generously supplied with euros to ease tension at the end of September, when commercial banks squared their books before heading into the fourth quarter.

    But the ECB carefully monitors the amount of cash in circulation and adjusts it through so-called "fine-tuning" operations that keep rates close to its benchmarks and prevent excess supply from fueling inflation.

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

    The ECB and other major central banks have been pumping huge amounts of cash in the form of loans to ease turmoil stemming from the latest crisis in the U.S. financial sector, after the investment bank Lehman Brothers went bankrupt last month.

    Some analysts question whether the central bank moves are working however, saying that commercial lenders soak up the extra cash but do not lend to each other or extend it as credit to businesses.

    They reportedly use some of the funds to buy government treasury bills because they are presently considered one of the safest investments.

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