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| Lucas Papademos Vice President and Jean-Claude Trichet President, of the European Central Bank |
The European Central Bank had said on Monday that that from today it would offer unlimited funds at below market interest rates in a special operation to forestall a year-end liquidity crisis.
The move followed last week’s announcement by leading central banks that they would increase liquidity in a co-ordinated auction system.
Following slight falls in the Euribor 3- month inter-bank lending rate on Thursday and Friday last week, the rate rose to 4.949% on Monday. The last time that the rate was so high was in December 2000 when the ECB's benchmark rate was 4.75% compared with today's rate of 4.00%.
Monday's announcement by the ECB that it would meet all bids at a particular rate for a two-week period covering the turn of the year, is the second time for the central bank to make such a move. The first time was Aug. 9th, when it pumped nearly €95 billion in overnight funds into the market.
The Federal Reserve, as part of its response to the credit squeeze, on Monday began to auction off the first of as much as $40 billion in low-rate loans to banks. The results will be announced on Wednesday.
Usually when the ECB provides Eurozone banks with funds for routine business, it puts a cap on the amount it lends. But given the current desire to reduce the gridlock in the credit system, the ECB said it would meet all bids at or above 4.21%, the average interest rate of last week's routine funding operation.
On Tuesday, the ECB found that there was a huge demand for the emergency lending, which amounted to a total of €348.6 billion - - $502 billion - more than a half trillion.
Euribor rates spiked in recent weeks in advance of year-end bank housekeeping.
Prior to the operation, the ECB had estimated banks would need €180.5 billion for routine business.
The ECB's move resulted in a fall in the Euribor two-week interbank rates to between 4.25% and 4.3%, closer to the ECB's 4% key benchmark rate. Last Friday, the two-week rates jumped above 4.9%.
The Euribor 3-month rate fell today to 4.876% from 4.949% on Monday. The rate was the lowest level since Dec 5th,
The 3-month rate is still very high compared with the ECB's benchmark rate of 4.0%. Lenders are likely to remain cautious about lending well into 2008 at a time when many economies are expected to slow.
