Cash scramble forces ECB to intervene

 

Banks spooked by mounting credit losses in Europe scrambled for cash today and prompted the European Central Bank (ECB) to pump in money to calm markets.

The ECB tried to calm markets by injecting a record €94.8 billion in overnight funds into the money markets after short-term interest rates soared when France's biggest listed bank, BNP Paribas, froze withdrawals from three funds hit by US subprime mortgage market problems.

The Bundesbank hosted a meeting with banks involved in the rescue of Europe's highest profile subprime victim yet, lender IKB, to arrange details of its €3.5 billion bailout.

The cost for banks to borrow money overnight in the world's second-largest economic region shot up to 4.62 per cent, the highest level since October 2001 and way above the ECB's 4 per cent target.

Only when the ECB offered banks extra cash to assure orderly conditions did rates return to normal levels.

Traders are on edge waiting to see whether the US Federal Reserve will follow suit. Overnight money in the United States opened at 5.5 per cent, a quarter point above target.