ECB liquidity intervention exceeds demand

The massive amounts of liquidity pumped into financial markets by the European Central Bank (ECB) appeared yesterday finally to have exceeded demand - but Jean-Claude Trichet, the bank's president, insisted that there had been "no bail-outs".

Demand in an auction of three-month money by the ECB yesterday fell short of the €50 billion that the central bank was prepared to offer - the first time in its history that it has seen such a shortfall.

At the same time, the Frankfurt-based institution was able to mop up €133.6 billion of overnight money.

The latest moves suggested that the series of measures unveiled by the ECB in recent weeks had eased banks' fears about the year-end, when financial institutions are under severe pressure to show strong liquidity on their books.

Separately the ECB announced that 39 banks had taken part in an auction for $10 billion in one-month funds arranged as part of last week's concerted action by central banks, also including the US Federal Reserve.

At the start of the financial market crisis in August, the ECB took financial markets aback by offering unlimited overnight liquidity in an attempt to ease financial market tensions.

In one of its boldest moves yet, the Frankfurt-based institution had on Tuesday provided almost €350 billion on a two-week basis - covering the year-end period.

The €133.6 billion mopping-up exercise yesterday suggested Tuesday's operation had gone too far in terms of the extra liquidity on offer.

The "super-injection was more than people needed," said Erik Nielsen, European economist at Goldman Sachs.

Further ECB mopping-up operations are likely in coming days.

Mr Trichet told the European Parliament that the ECB had always ensured that the large amounts of liquidity allocated were absorbed later on and were secured against "solid collateral".

The ECB had "displaced in time" its provision of funds, but not added liquidity. "There is absolutely no bail-out," he said.

The ECB has repeatedly argued that the aim of its money market operations is to keep very short-term interest rates in line with its main policy rate, currently at 4 per cent - the level it deems consistent with its responsibilities for controlling inflation. Yesterday's mopping-up action came after market interest rates fell below that level.

The ECB president's comments appeared aimed at quashing any suggestion that additional liquidity is being pumped into financial markets irresponsibly - with potentially inflationary consequences. "There is none of this helicopters [dropping money] stuff going on," said Julian Callow, economist at Barclays Capital.

Mr Trichet told the European parliament that the ECB's responsibilities for ensuring the smooth functioning of money markets and for combating inflation "are clearly distinct and should not be mixed".