MercoPress. South Atlantic News Agency

EU Central Bank ready to pump 348 billion Euro liquidity

The European Central Bank has allocated 348.7 billion Euros, (502 billion US dollars) to banks at a below-market rate in a refinancing move to ease tightened credit markets.

ECB is one of five central banks that have injected billions in emergency cash into money markets. The aim is to cut the cost of lending between retail and commercial banks, which has jumped in the past few weeks. All banks with enough collateral, and which submitted bids of at least 4.21%, received funds from the ECB. The ECB move - making the extra cash available over the next two weeks -will ease fears of a credit meltdown over the Christmas period, when banks need extra cash. The hope is that lower interbank rates will mean that banks will also be able to make more funds available at cheaper rates to companies and individuals. The ECB action has succeeded in cutting short-term lending rates, although they are still above the 4% ECB refinancing rate. In Frankfurt on Tuesday morning the two-week Euribor average of interbank unsecured lending rates did fall to 4.452%, compared to rates for two-week Euro money market rate of 4.949% for interbank borrowing which has been in place over the past few days. The two-week ECB refinancing operation is the first time it has said it would offer banks unlimited funds, above a certain interest rate, since 9 August when the credit crisis started. The main reason banks have been unwilling to lend to each other is a downturn in the US property market. A surge in mortgage defaults and bad debts has forced many banks to cut the value of their mortgage investments, costing them billions of dollars. As a result, the banks fear that they might need any spare cash they have to cover their losses. Central banks have also been boosting liquidity into the banking sector to ensure banks keep offering credit to businesses. On Monday, the US Federal Reserve made 20 billion available through auction, though it did not say how many banks took advantage of the extra money. As well as the Fed, and the European Central Bank, the national banks of England, Canada and Switzerland are also involved in the funding plan. However some analysts say that until the banks reveal the true scale of their potential losses, the central banks will be unable to do much to ease the credit crunch.