Fed leads fresh $200bn money market intervention

By Norma Cohen, Economics Correspondent

A group of the world’s largest central banks launched a co-ordinated effort to inject liquidity into money markets in North America and Europe, with the US Federal Reserve offering to double the sums it is prepared to lend, raising the total facilities available by a further $200bn from what it announced only last Friday.

The Fed also said it would increase the currency swap arrangements it already put in place with the European Central Bank and the Swiss National Bank by $10bn and $2bn respecitvely. In addition, the terms of the swap agreements have been extended through to the end of September 2008.

Although the funds will be loaned to banks and primary dealers, or brokers that trade directly with the Fed, the US central bank is hoping that the fresh liquidity will be extended to market participants such as hedge funds which are struggling to raise it.

The move by the Fed, which follows a $200bn emergency intervention by the US central bank on Friday to ease strains in the credit markets, sent equities in Europe and the US sharply higher and helped the dollar rebound against the world’s leading currencies. Gold and oil retrenched from their recent highs.

The S&P 500 opened 2.4 per cent higher at 1,303.26, the Nasdaq Composite climbed 2.4 per cent to 2,221.27 and the Dow Jones Industrial Average put on 2.3 per cent to 12,014.42.

In London, the FTSE 100 soared 149.5 points or 2.6 per cent to 5,777.4 in afternoon trade. Frankfurt’s Xetra Dax climbed 2.1 per cent to 6,584.67 and the CAC 40 in Paris gained 2.4 per cent to 4,676.46.

The dollar, which earlier in the session sunk to a fresh record low of $1.5495 against the euro after a survey of German economic confidence came in much stronger than expected, rebounded to stand at $1.5385, down just 0.3 per cent on the session.

In the fixed-income market Treasuries sold off sharply with the yield on the 2-year note jumping 22bp to 1.70 per cent while the 10-year note yield climbed 11bp to 3.57 per cent, flattening the yield curve.

Markets have been in turmoil in recent days as margin calls on hedge funds and other investors have forced a mad scramble for cash. The rush to raise cash has forced sales of securities, which in turn is knocking down the price of other collateral pledged for loans. Fears are that that, in turn, will set off yet more margin calls in a frightening downward spiral that leaves banks in a frantic dash to raise still more cash.

Rising short term interest rates suggest banks are already struggling. In the UK, the key 3-month Libor rate was fixed on Tuesday at 5.79 per cent, the highest level in two months and well above the Bank rate of 5.25 per cent.

The Bank of England has joined the operation, and left open the possibility that it could even increase sums available. It announced it would extend its 3-month open market operation, rolling over an existing collateralised loan that expires next week. It will offer £10bn to the market for three months on March 18 against the same expanded list of collateral it accepted in December and January and said that it will conduct a similar operation in April.

But it declined to specify the April amount, saying the sum to be loaned will be decided “in the light of March’s operation.”

The European Central Bank also said it will join the co-ordinated effort to add US dollar liquidity to the system. It will offer auctions on 25 March, replacing loans made to the market three months earlier and make available up to $15bn. The Swiss National Bank said it will add US dollar liquidity at the end of this month via collateralised, 28-day loans totalling $6bn.

Bank of Canada, which cut its key rate by a half point last week, is also participating in the liquidity injection. It will loan C$2bn to the banking system for one month beginning next week and a further C$2bn for a month beginning in April.

The Swiss National Bank, the Sveriges Riksbank and the Bank of Japan also part of the co-ordinated intervention.