MercoPress. South Atlantic News Agency

Central banks inject funds to contain fears of global credit crunch

Central banks inject billions to calm markets

The European Central Bank, ECB, pumped 94.8 billion Euros into the Euro zone banking market Thursday in an attempt to contain fears about a sub-prime credit crunch spilling over from United States.

The ECB made the money available in the form of loans, an offer taken up by 49 banks and other financial institutions. This came after French bank BNP Paribas suspended three investment funds worth 2 billion Euros, citing problems in the US sub-prime mortgage sector. The bank said in a statement: "The complete evaporation of liquidity in certain market segments of the US securitization market has made it impossible to value certain assets fairly regardless of their quality or credit rating" US lenders have suffered a sharp rise in defaults on higher-risk mortgages and it is feared that the financial repercussions of this slump could soon spread to Europe. The ECB described the move as a "fine-tuning operation" for the banking market, but it represents the bank's single largest intervention in the banking sector since the immediate aftermath of the 9/11 attacks on the US in 2001. The three funds BNP Paribas has suspended are Parvest Dynamic ABS, BNP Paribas ABS Euribor and BNP Paribas ABS Eonia. BNP Paribas added the valuation of the suspended funds would resume "as soon as liquidity returns to the market". Other banks have also suspended funds with sub-prime investments. Defaults on the loans, which are aimed at those on low incomes or with a poor credit rating, have risen as interest rates charged on the loans have risen. Also on Thursday, Dutch bank NIBC announced losses of 137million Euros from asset-backed securities in the first half of this year. The bank said "severe instability in the US credit fixed income markets" had been a factor behind the fall. Reports from Frankfurt indicated that several German financial institutions face similar situations with exposure to the US sub-prime market. In June, US bank Bear Stearns had to spend 1.6 billion US dollars to bail out two hedge funds, which had a strong focus on sub-prime loans. The bank had invested heavily on securities that were backed by sub-prime mortgages Later in the day the US Federal Reserve announced it had injected 12 billion US dollars in temporary reserves to the banking system, which is far above the 5 billion pumped Thursday a week ago. Meantime in Ottawa the Bank of Canada admitted it was in contact with other central banks over the global liquidity problems, but "no coordinated actions have been taken or are planned", said a spokesperson.