WHAT ABOUT BANKS IN EUROPE?

European Central Bank President Jean-Claude Trichet, trying to calm continuing nerves in the European Union and world economy, said that market participants should “keep their composure,” because he believed it would settle down.

He said the ECB was pouring more money into the market because of a “period of market nervousness” that was rattling economic leaders around the world, especially in the long-running aftermath of the American sub-prime mortgage market debacle.
Trichet referred to a “significant re-appreciation of risks,” and added: “In some respects, what has been observed can be interpreted as a normalisation of the pricing of risk,” Deutsche-Presse-Agentur (dpa) reported.

The ECB earlier this month jumped into the fray by injecting a 95 billion Euro into the money market, in response to tight credit in the European banking system as a result of the US mortgage crisis. The overnight operation brought short-term rates in the Eurozone down from a spike of close to 4.7 per cent to the four percent ECB benchmark, but fluctuations persevered.

The open market operation was unusual in that banks were allowed as much cash as they needed at four percent, instead of having to bid as is usually the case, as the ECB tried to become a stabilizing influence. It was the first time since the September 11 attacks in 2001 that the ECB had taken this kind of action.

The move sparked consternation on world stock markets and was seen by analysts as having contributed to falls around the world, as dealers speculated the ECB might have access to information on a serious credit crunch or the failure of a major bank.
Further additions of 61 billion Euro on August 10, 48 billion on August 13 and another eight billion the next day served to dampen overnight rates and helped calm markets. European stock markets rose August 10 and saw only slight falls on the next day in response to the ECB’s operations, but no one was ready to predict a quick righting of the markets.

“We have provided in particular the liquidity which was needed to permit an orderly functioning of the money market,” Trichet said, pledging that the ECB would “continue to monitor the situation.”

“I call on all parties concerned to continue to keep their composure. This attitude has been welcome and effective in the recent days. It will help to consolidate a smooth return to a normal assessment of risks in liquid markets,” he concluded.
Trichet has repeatedly signalled that the ECB will hike rates at the next Governing Council meeting on September 6, and the markets have priced in a rise to 4.25 percent in the refinancing rate.

Earlier, the Bank of Japan (BoJ) drained 1.6 trillion yen (USD 13.53 billion) from the banking system after adding one trillion yen on August 10 and another 600 billion on August 13.

The US Federal Reserve has also added liquidity, providing USD 38 billion dollars on August 10 and two billion three days later. Other major central banks, with the exception of the Bank of England, have acted similarly.
The leading indices on Europe’s stock markets were little changed, despite the huge influxes of cash. London’s FTSE went up 0.5 per cent, while Frankfurt’s DAX 30 and Paris’ CAC 40 were virtually unchanged in the initial reaction.