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Central banks dole out cash as bailout doubts grow

(Agencies)
Updated: 2008-09-26 15:10

FRANKFURT/SYDNEY -- Central banks across the world scrambled on Friday to meet a desperate demand for cash, both in their own currencies and the US dollar, as the White House's $700 billion bailout plan ran into roadblocks.

Traders gather at the Bank of America kiosk on the floor of the New York Stock Exchange in New York, September 24, 2008. [Agencies]

News of the biggest ever US bank failure only added to the thirst for liquidity, with the government brokering a last-ditch purchase of thrift Washington Mutual by JPMorgan.

"The market is just frozen at the moment," said Claudio Piron, a strategist at JPMorgan Chase Bank in Singapore.

"We are at such a point of absent liquidity that prices are beginning to fail in their usefulness as a signal, this in itself is disturbing."

Overnight dollar funds remained in a broad 2.5-3.5 percent range in Asia, bankers in Singapore said. Short-term lending rates in local currencies jumped with Singapore dollar overnight rates at 2 percent, their highest since end-January.

Unease intensified after House Republicans balked at Treasury Secretary Henry Paulson's plan to buy bad debt from banks and instead floated an idea of their own for mortgage insurance, casting the whole bailout into doubt.

With commercial banks everywhere hoarding cash and reluctant to lend to each other, central banks were increasingly stepping in to fill the void.

The extremely tight money market conditions were exacerbated by banks hoarding short-term cash before closing their books on the third quarter next week.

Also making matters worse, three-month funding needs were rolling over into the year-end closing, which was also next week.

The Swiss National Bank offered $9 billion for one week, saying central banks were taking the array of initiatives to address the severe quarter-end stresses.

The European Central Bank soon followed suit, offering $35 billion for one week. The Bank of England said it would lend $30 billion.

On Thursday, three-month US dollar LIBOR shot up nearly 30 basis points to 3.769 percent, its highest levels since January and nearly 2 percentage points above the expected federal funds rate in three months time.

That is double the levels seen in previous money market crunches since the credit crisis struck in August last year.

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