Central Banks Soothe Nervous Markets

Kumbaya My Lord, Kumbaya

Someone's cratered Lord, Kumbaya

Need a Rate Cut Lord, Kumbaya

Oh Lord Kumbaya


ECB, Bank of England Join Fed in Soothing Markets After Lehman
By John Fraher

Sept. 15 (Bloomberg) -- The European Central Bank and the Bank of England joined the Federal Reserve in taking action to sooth financial markets spooked by Lehman Brothers Holdings Inc.'s bankruptcy filing.

The ECB said it awarded banks 30 billion euros ($43 billion) in a one-day money-market auction that was more than three times oversubscribed. The Bank of England loaned banks 5 billion pounds ($9 billion) for three days. Earlier, the Federal Reserve widened the collateral it accepts for loans to securities firms.

Stocks plunged and bonds surged after Lehman became the latest victim of a yearlong credit squeeze. Financial institutions worldwide have reported more than $500 billion in losses and writedowns and the credit-market turmoil has erased $11 trillion from global stocks in the past year.

``It remains to be seen whether today's operation will be sufficient to restore market confidence,'' said Jacques Cailloux, chief euro-area economist at Royal Bank of Scotland Group Plc. ``The ECB will likely wait for the U.S. open to consider more aggressive action. Key will be how credit and equity markets develop in the coming days.''

ECB President Jean-Claude Trichet told reporters in Frankfurt as he arrived for an award ceremony that he had nothing to add to today's statement. The ECB said it injected the funds at a marginal rate of 4.30 percent. The Swiss central bank offered liquidity through its overnight facility for the first time since Feb. 22.

The ECB and the Bank of England may nevertheless hold off cutting rates right away as they seek to curb inflation. The ECB has spent much of the past year arguing that it can use its money market operations to tackle the credit crisis and doesn't need to resort to rate cuts.

``Rate cuts are only likely to be forthcoming if financial markets melt down in the coming days or weeks,'' said David Mackie, chief European economist at JPMorgan Chase & Co. ``For the time being, European policy makers look like they will continue to hold the line on the separation of powers. At some point though, that line could be reached.''

The cost of borrowing on money markets may also jump. The so- called OIS spread, the gap between three month dollar funds and traders' bet on the Fed's daily effective federal funds will rate, widened to 105 basis points today, the most since Dec. 6. That compares with 87 basis points at the end of last week.