European central banks joined Asian counterparts in pumping more cash into paralysed money markets on Monday, but commercial banks preferred to hoard cash rather than lend to each other as the financial crisis spread in Europe.
With the end of the financial quarter compounding liquidity tensions, the European Central Bank lent banks a massive 120 billion euros of 38-day funds in an auction, filling all but 15 percent of their bids, and promised to keep the extra cash in play until at least early 2009.
The Bank of England injected 40 billion pounds ($73.53 billion) of three-month funds on Monday to improve sterling market conditions after a weekend of bank failures in Europe and talks in the United States to seal a $700 billion bailout.
The Bank of Japan added 1.5 trillion yen ($14.2 billion) to its banking system, the ninth consecutive day it pumped in cash, before adding another 400 billion yen on a spot basis, and the Reserve Bank of Australia added A$2.7 billion ($2.2 billion).
But the interbank cost of borrowing dollars, euros, or sterling for three months rose as a string of bank nationalisations in Europe suggested the year-old global credit crisis was far from over, even though US lawmakers were gearing up for a vote on the $700 billion fund to buy bad debt.
Financial group Fortis was forced to accept an 11.2 billion euro ($16.4 billion) injection by the governments of Belgium, the Netherlands and Luxembourg after talks with ECB President Jean-Claude Trichet to prevent financial contagion engulfing one of Europe's top 20 banks.
In Britain, the government nationalised mortgage lender Bradford & Bingley and sold its branches and deposits to Spanish bank Santander German mortgage lender Hypo Real Estate struck a last-minute deal with a group of banks for credit to resolve a refinancing squeeze while Iceland's government bought a 75 percent stake to take control of Glitnir bank whose funding position deteriorated in recent days.
"One sees now that not only American but also European banks are affected and that the crisis is after all global," said Carsten Klude, strategist at MM Warburg. "A rescue plan worth 700 billion is simply not enough to overcome the crisis for the foreseeable future. If anything, all the real economy problems will escalate as a result in the foreseeable future."
Once a byword for safety and liquidity, the short-term lending market in which banks lend to each other has repeatedly seized up during the financial crisis because of increasing worries over the creditworthiness of borrowers.
In another liquidity first, the ECB called for bids in a special 5-1/2 week tender - covering the end of the quarter - and said it would act as needed to keep overnight rates near its 4.25 percent benchmark.
"The ECB will continue to steer liquidity towards balanced conditions in a way which is consistent with the objective to keep very short term rates close to the minimum bid rate," the ECB said in a statement. Euro zone banks deposited a record 28 billion euros at the ECB overnight as of Sunday rather than lending it out to other institutions, highlighting mistrust over other banks' soundness.
ECB Governing Council member Nout Wellink said he would have expected bank share prices to rise in the wake of a government rescue, rather than to fall as was the case The ECB, BoE and the Swiss National Bank also continued to offer extra dollar liquidity to local institutions as part of a deal with the US Federal Reserve.
Upward pressure on overall rates continued in Japan, with foreign players struggling to find sources of cash as Japanese market participants refrained from lending actively before the end of the fiscal half-year on September 30. Bank of Japan Deputy Governor Kiyohiko Nishimura said on Monday the bank should be attentive to downside risks to economic growth. But he added that the chance of a deep adjustment to the economy was small and that the country's financial markets were functioning well.
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