ECB launches new bid to drain liquidity from Eurozone

The European Central Bank (ECB) said on Friday it would seek to drain a further €150-billion from Eurozone money markets through a new offer aimed at absorbing excess liquidity.

The offer had a fixed rate of 4%, the same level as the ECB’s benchmark lending rate, and would come to maturity on December 31. The bank on Thursday absorbed €145,64-billion from the market in a similar operation.

The ECB over the last few days has been providing liquidity for periods of two weeks or longer while mopping up excess cash in the shorter term to ensure that inter-bank lending markets are amply supplied — but in a manner that does not fuel inflation.

The latest operation was aimed at absorbing liquidity that had built up in the market since the start of a crisis last August in the United States subprime — or high-risk — mortgage sector.

The subprime meltdown, which has seen a wave of foreclosures, left major banks that held shaky mortgage-backed securities reluctant to lend money, raising the spectre of a global credit crunch.

That stance in turn prompted central banks in Europe and elsewhere to inject huge sums of money into the market.

The ECB, for example, last week made a record €350-billion available at 4,21%, an especially attractive offer that was below the rate charged by banks themselves. The objective was to prompt a realignment in short-term bank rates that had crept up in previous weeks, bringing them closer to the Eurozone’s minimum bid rate of 4%. — Sapa-AFP

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