Wary central banks make fresh cash injections

Central banks in Europe and Japan pumped out tens of billions more dollars on Monday to help commercial banks hit by the United States home-loan sector crisis, as shares bounced back from a turbulent week.

The European Central Bank injected another €47,66-billion after putting a record €155,85-billion into the market last Thursday and Friday.

The bank, seeking to assure rattled investors, said conditions were gradually returning to normal, as European and Asian stock markets rallied after taking a battering last week from the US subprime mortgage-sector crisis.

But dealers said the mood was edgy as the market waited anxiously to see whether Wall Street, when it opened later on Monday, could maintain Friday’s late recovery.

London’s FTSE 100 of leading shares was 1,89% higher in midday trade while in Frankfurt the DAX 30 was 0,88% higher and the Paris CAC 40 climbed 1,10%.

Japan’s central bank said earlier on Monday it would pump another 600-billion yen ($5-billion) into the money market, on top of a one-trillion-yen injection on Friday.

Most Asian stock markets made wary gains after the hammering they also took last week.

The Tokyo Stock Exchange’s benchmark Nikkei-225 index closed up 0,2% after plunging 2,37% on Friday to a near five-month low.

But oil prices were higher in Asian trade amid lingering worries that the US subprime mortgage crisis would hobble US economic growth.

“Fund injections by central banks here and in the US, as well as Europe and elsewhere, helped diminish the downside prospects for the world’s stock markets, although investors are still cautious,” said Hiroichi Nishi, an equities information manager at Nikko Cordial Securities.

The Frankfurt-based ECB, which sets monetary policy in France, Germany, Italy and the 10 other nations that use the euro, said Monday’s cash injection would be lent to banks at a minimum interest rate of 4%.

“With this fine-tuning operation, the ECB is further supporting the normalisation of conditions in the money market,” it said.

The cash injections by central banks, which enable commercial banks to borrow from the central bank to meet their liquidity needs, are aimed at forestalling a credit freeze linked to problems in the US subprime mortgage market.

Subprime loans are mortgages offered at higher than average rates to Americans who have a poor credit rating and might otherwise be denied credit.

The current crisis stems from concerns that banks exposed to losses in the US subprime market might have insufficient cash to continue lending normally, drying up funds needed for investments and thereby damaging the economy.

But the German government said that the biggest economy in the eurozone would weather the storm.

“We do not see any negative influence on economic growth,” an Economy Ministry spokesperson said.

The chief international economist at Capital Economics, Julian Jessop, said there was no reason to panic over a purported market “meltdown”.

“This is the third sell-off since the start of 2006,” he said, although he noted the other two were not as severe. “Markets recovered from the last two without any significant fall-out on the wider economy.”

Analyst Mitul Kotecha, with Calyon Financial, said skittishness on the markets could prompt central banks to lower interest rates.

“Anytime there is any improvement in sentiment, it only takes more bad news from a hedge fund or bank to reverse it again,” he warned.

“The longer it continues, the greater the chance of rate cuts, but even that may matter little if this develops into a full-blown credit crunch.” — AFP

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