Emergency help for financial markets entered new territory last night as the European Central Bank (ECB) announced it would today offer unlimited funds at below market interest rates in a special operation to head off a year-end liquidity crisis.
The surprise move, which follows last week's co-ordinated barrage of measures by the world's central banks to increase market liquidity, suggests the ECB is still frustrated at the failure to ease market tensions.
The measure was reminiscent of the ECB's operation on August 9th, at the start of the global credit squeeze. But that was for overnight loans while the new offer is for two weeks.
Analysts warned that the measure risked increasing market volatility and saw the central bank breaking new ground in helping out the banking sector.
"This is basically Father Christmas to those who have access," said Erik Nielsen, economist at Goldman Sachs. "They are bailing out people who have not really adjusted their balance sheets to the new reality."
The ECB move came at the end of a day when markets demonstrated how fragile confidence is. Fears for the US economy after publication of stronger than expected inflation data doused hopes for further rate cuts by the Fed to ease the credit crisis. That knocked US shares on Friday and markets in Asia and Europe followed suit yesterday.
The pan-European FTSEurofirst 300 index lost 1.6 per cent to 1,491.7, its weakest finish this month. Indices in London, Paris and Frankfurt were all off between 1 and 2 per cent. The Iseq was again significantly weaker than its peers, giving up more than 3 per cent at one stage before battling back to close 2.7 per cent off.
The ECB had already announced that today's regular weekly money market operation would mature on January 4th - covering the year-end when financial institutions will be under pressure to show strong liquidity on their books.
But last night it said in addition that it would satisfy all bids offering 4.21 per cent or more. Prior to the announcement, the cost of borrowing two-week money had soared to 4.9 per cent but fell sharply afterwards as the ECB's move in effect put a cap on market interest rates.
The ECB offered little explanation for its move beyond saying that it was "fully consistent" with its aim of keeping interest rates close to its main policy rate of 4 per cent.
The latest move underlines the limited impact of last week's co-ordinated intervention which included a new liquidity facility at the US Federal Reserve.
