KEY POINTS:
A cash crisis struck international finance markets across North America and Europe this morning (NZ time).
Major central banks swept in to calm credit markets spooked by mounting losses, with the European Central Bank injecting record amounts of cash to prevent the financial system from seizing up.
US
President George W Bush also sought to calm fears that a credit market squeeze would shake economic growth, telling a news conference both the global and US economy were strong.
"I'm told there is enough liquidity in the system to enable markets to correct," Bush said.
The Bank of Canada said it was in contact with other central banks on the global situation and stood ready to add money as needed.
The European Central Bank pumped a record 94.8 billion euros ($173.2 billion) into Europe's money markets as banks scrambled for cash after France's biggest listed bank, BNP Paribas, froze withdrawals from three funds. It cited US subprime mortgage market problems.
Another European fund valued at 750 million euros was frozen too, and a Dutch bank pulled its planned new listing after suffering subprime losses.
The US Federal Reserve and the Bank of Canada both pumped in money through regular operations aimed at bringing benchmark overnight interest rates back to target. The Fed injected US$24 billion ($31.7 billion) and the Bank of Canada $C1.64 billion ($2.1 billion) -- in both cases more than normal, but amounts analysts said did not reflect an emergency injection of liquidity.
Michael Darda, chief economist at MKM Partners in Greenwich, Connecticut, said the Fed injection of funds was a normal response to funds trading above target. Strong demand had pushed the federal funds rate up to 5.5 per cent, above the 5.25 per cent Fed target, but it retreated to 5.438 per cent.
"It's a mini-panic, and we are seeing demand for short-term credit," he said. "We are not seeing a so-called 'credit crunch' in the US money market."
Nonetheless, US interest rate swaps, a measure of market risk appetite, widened sharply on renewed credit worries. Stocks fell and investors piled into the safety of bonds, pushing down the yield on US Treasuries and European government debt.
In Europe, traders said cash markets were seizing up until the ECB acted. "There appears to be a dash for cash both in dollars and in euros," said Nick Parsons, head of market strategy at nabCapital in London.
The ECB tried to calm markets by injecting the largest amount of money ever in a single operation, saying "the aim was to assure orderly conditions in the euro money market." It routinely holds quick market operations when there is a cash imbalance but not since after the US terror attacks in 2001 has the size neared Thursday's level.
The BNP problems had sent jitters through European markets already rife with rumors of worsening troubles in Germany. The Bundesbank hosted a meeting with banks involved in the rescue of Europe's highest profile subprime victim yet, lender IKB , to arrange details of its 3.5 billion euro bailout.
"Nobody wants to lend any money. It's safety first." said Karen Birzler, a money market trader at HVB in Munich.
The cost for banks to borrow money overnight in the euro one, the world's second largest economic region, shot up to 4.62 per cent, the highest since shortly after the 2001 US attacks, and above the ECB's 4 per cent target.
Only when the ECB offered banks extra cash to assure orderly conditions did rates return to normal.
A Zurich-based money market trader called market conditions "crazy" since Fed Chairman Ben Bernanke has given no signal of concern that credit markets could undo the real economy.
"The market is acting like a yo-yo. It's all very psychological. The possibility of a credit crunch returning is starting to spook everyone," he said.
A rates strategist at a large European bank in London said that fear of a scarcity of liquidity, whether irrational or otherwise, 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.
US dollar deposit rates for tomorrow/next day delivery surged by more than half a point, before easing back. It was the first time since December 2000 they had jumped over half a point in a single day, according to Reuters data.
The scramble for cash forced traders to unwind so-called carry trades, where low-yielding currencies are sold to finance purchases of higher yielding assets.
This sparked a broad-based yen rally, but the surge in short-term dollar deposit rates lent the dollar support against most other major currencies.
- REUTERS