A late rally could not prevent the Irish Stock Exchange slumping by more than 2 per cent yesterday as shares in Dublin plunged in line with other European markets. Investors were spooked by subprime credit problems in the US. Ciarán Brennanreports.
French bank BNP Paribas's decision to freeze payments from three of its funds invested in the crisis-hit US subprime market re-ignited fears of a credit crunch as investors sold out of risky assets.
Even intervention by the European Central Bank (ECB) to pump nearly €95 billion into Europe's banking system after signs that liquidity was drying up failed to allay jittery investors' fears.
In equity markets, the FTSE, the leading UK stock index, lost 1.83 per cent, Germany's DAX fell 2 per cent and France's CAC-40 fell 2.17 per cent after being down more than 3 per cent.
The funds lent by the ECB exceeded its only previous major intervention - on the day after 9/11 - when it lent €69 billion followed by €40 billion over subsequent days. Even more striking was its one-day pledge to meet 100 per cent of all funding requests from financial institutions.
This liquidity injection was designed to ensure the banking system continued to function and did not succumb to a credit freeze. Ed Marrinan, head of credit strategy at JPMorgan, said: "This appears to be a prudent, pre-emptive step to head off any possibility of liquidity problems."
A strategist at a European bank said fear of a scarcity of liquidity was taking hold. "It's about lines of credit, fear that credit lines will be called and institutions will have to make money available to others who are facing big credit-related losses," he said. European liquidity problems initially spilled over to the US, where the benchmark federal funds rate moved above the Federal Reserve's target rate of 5.25 per cent to more than 5.75 per cent in early trading.
The Fed also stepped up its provision of liquidity. The New York Fed injected $24 billion into the markets in two operations, bringing forward the second by 15 minutes to calm nerves. The figure is roughly double the normal, but suggests the Fed is not in full crisis-fighting mode.
Dealers in Dublin described the Irish market, which shed 192.87 points to 8701.13, as very volatile.
"I've only seen it this bad about seven years ago," said one. "You think you've seen the worst and then some other news breaks." - (Additional reporting, Financial Times service, Reuters).
