The Bank of England launched a scheme on Friday to buy short-term corporate debt, the first stage of a British drive to breathe life into moribund credit markets and stave off the worst effects of recession. The facility enables the BoE to finance firms directly through the purchase of commercial paper with a maturity of three months or less, and is the first part of the BoE's Asset Purchase Facility to go into operation.
Finance minister Alistair Darling announced the APF last month, and gave the Bank of England an initial budget of 50 billion pounds ($72 billion) to break the logjam in British credit markets, which BoE Governor Mervyn King has described as one of the most serious threats to the economy.
The BoE will publish daily at 1000 GMT the rates at which it will buy newly issued three-month commercial paper, calculated as the day's risk-free market interest rate, plus a spread of 75-300 basis points based on the credit quality of the paper. For A1-rated three-month paper, the BoE said it would charge an interest rate of 1.27 percent on Friday, while for A3-rated paper - the lowest rating accepted under the scheme - the rate would be 3.52 percent.
The central bank will accept only sterling paper issued by a British-registered company that either makes a significant contribution to the British economy or finances firms that do, and will charge a 25 basis point premium for paper bought in the secondary market rather than at issue.
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