Banks granted liquidity boost

Tim Wallace
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A POTENTIALLY unlimited amount of dollar liquidity is to be injected into banking markets throughout the world, five central banks announced yesterday.

It is hoped the measure will boost money markets in the wake of the Eurozone debt crisis.

The Bank of England, European Central Bank (ECB), US Federal Reserve, Bank of Japan and Swiss National Bank have all announced a series of reverse repo operations to give banks more security and certainty in terms of dollar liquidity over the year end.

“We welcome the move,” said Investec’s Philip Shaw. “Nonetheless markets should be under no illusions whatsoever that this is a ‘cure all’,” he warned.

Risk assets surged following the news. The FTSEurofirst 300 index of top European shares closed up 2.1 per cent, while the Eurostoxx 50 spiked by nearly 3.5 per cent.

The euro soared over one per cent against the dollar, touching $1.393 at one point.

Bank shares also pared recent losses. Lloyds jumped by 7.2 per cent, while HSBC and Barclays both rose just short of four per cent. Across the channel, BNP Paribas stocks leapt by over 13 per cent.

“From a funding point of view this eases market concerns,” said BNP Paribas’ head of foreign exchange strategy Steven Saywell. “This is very useful – there was increasing concern about the debt situation and nervousness about the prospect of Greek default.”

“The only limit on the amount we will lend is demand for the facility and the collateral to back it,” an ECB spokesman said. “Clearly the central banks have to limit their credit risk by taking collateral and applying a haircut to it.”

The loans will have three-month maturities. One-week maturities are usually on offer in central banks’ more regular operations.