The European Central Bank has taken the highly unusual step of issuing €94.8 billion of loans to the market to try to boost liquidity.
The money has been injected into the markets as an unlimited cash offer at a lending rate of 4 percent, after overnight rates increased dramatically to 4.7 percent.
“This liquidity-providing fine-tuning operation aims to assure orderly conditions in the euro money market. The ECB intends to allot 100 per cent of the bids it receives,” the ECB said in a statement.
A banker close to the ECB said: “We noticed the overnight rate was moving away from the rate determined by the governing council, and the issuance has been made to bring it towards the correct rate.”
The intervention is the most dramatic by the central bank since the terrorist attacks of September 11 2001.
According to the UK-based Times newspaper, the US Federal Reserve will also provide $12 billion of temporary reserves to the American banking system through 14-day security repurchase agreements. This would be a $7 billion increase on the $5 billion of reserves added last Thursday.
The ECB’s move is intended to boost liquidity in a market where many investors have stopped buying, amid growing fears of a credit crunch. The cash injection will provide investors with loans at artificially cheap rates to invest across the market.
The leveraged loan market has been one casualty of the recent credit freeze, with lenders struggling to syndicate a $250-350 billion pipeline of leveraged loans.
However, Larry Slaughter, co-head of European mergers and acquisitions at JP Morgan, said: “This is theoretically a positive because the base rate will ease, but it will hardly be measurable because the ECB is an AAA-rated institution.”