The Financial Times indicated today that European banks were willing to provide commercial paper only on an overnight basis to a relatively lengthy list of names they regarded as under stress. That is a dramatic departure from normal market operations. Accordingly, the European Central Bank has found it necessary to infuse funds for a third day. The Fed and the Japanese central bank, at least for the moment, are not participating in this operation. However, the amount was smaller than in previous days and the ECB tried to put a positive spin on this development, declaring that the markets were stabilizing.
The European Central Bank lent emergency money to banks for a third day, paring the amount and declaring that markets are returning to normal.
The ECB loaned 47.7 billion euros ($65 billion) to banks, down from 61.05 billion euros on Aug. 10. The U.S. Federal Reserve, the Bank of Japan and Australia’s central bank today resumed normal refinancing operations and refrained from providing extra funds.
The ECB, the Fed and other central banks injected $154 billion into money markets on Aug. 9 and $135.7 billion on Aug. 10 amid fears that U.S. subprime mortgage losses will curtail lending. Stocks rallied worldwide and U.S. index futures advanced as concern about a squeeze on credit abated.
“The situation is gradually normalizing,” said Jose Luis Alzola, director of economic and market analysis at Citigroup Global Markets in London. “However, fears will subside gradually rather than quickly.”
The overnight rate at which banks lend euros to each other fell to as low as 3.95 percent from 4.16 percent earlier today. It spiked to 4.62 percent on Aug. 9, a six-year high. The ECB’s benchmark refinancing rate is 4 percent….
Goldman Sachs Group Inc. and investors including C.V. Starr and Perry Capital LLC will invest $3 billion in the firm’s Global Equity Opportunities Fund after it fell 28 percent in August.
“We believe the current values that the market is assigning to the assets underlying various funds represent a discount that is not supported by the fundamentals,” New York-based Goldman said today in a statement.
The Frankfurt-based ECB said today that “money market conditions are normalizing.”
Central banks in South Korea, the Philippines, Singapore, Indonesia, India and Malaysia have said they are prepared to add cash to their systems if required to prevent a squeeze on credit. The Reserve Bank of New Zealand today said it was “business as usual” in its conduct of daily operations.
The International Monetary Fund said last week that “prompt action” by central banks to add cash to the banking system should help avert a crisis in credit markets.
“While the situation is still evolving, we continue to believe that the systemic consequences of the re-assessment of credit risk that is taking place will be manageable,” the IMF said.
The IMF said on July 25 that growth in Europe, Japan and emerging markets including China and India is proving stronger than expected, compensating for a weaker U.S. economy. The fund predicted the global economy will expand 5.2 percent in 2007 and 2008, more than the 4.9 percent it forecast in April.
Recent market turbulence “won’t have much of an impact on the economy,” said Matthew Sharratt, an economist at Bank of America Corp. in London. “Therefore, the ECB will increase interest rates in September to 4.25 percent and probably keep this level for the rest of the year.”
The ECB has raised its benchmark rate eight times since December 2005, to a six-year high of 4 percent, and signaled on Aug. 2 that it plans to raise borrowing costs again next month to keep price increases in check.
Turmoil on credit markets has prompted investors to reduce bets on interest-rate increases by central banks in most industrialized countries, futures trading shows.
The chance of the Bank of Japan increasing borrowing costs at its meeting next week was at 32 percent today compared with 75 percent on Aug. 9, according to calculations by Credit Suisse Group.
In Europe, investors reduced expectations for higher rates in the U.K. and in the 13-nation euro area. Traders see an 84 percent chance the ECB will raise rates in September, down from 90 percent on Aug. 8.
They have also abandoned bets, made a month ago, on two rate increases from the Bank of England by the end of the year even though the U.K. has been alone among central banks in the Group of Seven in not pushing additional liquidity into the market.
Meanwhile, the U.S. might be the first G-7 country to lower interest rates again. U.S. federal funds futures indicate investors are betting the Fed will cut its target rate of 5.25 percent by a quarter percentage-point at its Sept. 18 meeting.
Since the ECB injected 95 billion euros on Thursday, 61 on Friday, and 47.5 on Monday, to be paid back on the next day every time, they actually have withdrawn liquidity from the markets again compared to Thursday. 34 and 13.5 billion on Friday and Monday, respectively. This is consistent with their statement that things regarding the interbank lending are stabilizing again. They just didn’t decrease the amount of additional liquidity at once on Friday, but they have cut it back gradually. That’s how I interpret the ECB’s actions on Friday and Monday.
Besides that, you have a very interesting blog, Yves.