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Credit fears spark fresh action Credit fears spark fresh action
(about 2 hours later)
The European Central Bank (ECB) has moved again to boost liquidity in the banking system, after warning of fresh volatility in financial markets.The European Central Bank (ECB) has moved again to boost liquidity in the banking system, after warning of fresh volatility in financial markets.
The ECB is lending billions at its minimum rate of 4% in its latest effort to counter the global credit squeeze.The ECB is lending billions at its minimum rate of 4% in its latest effort to counter the global credit squeeze.
Central banks are trying to cut the cost of credit after the rates at which banks lend to each other soared.Central banks are trying to cut the cost of credit after the rates at which banks lend to each other soared.
Credit conditions are tightening because of worries about banks' US mortgage-related losses.Credit conditions are tightening because of worries about banks' US mortgage-related losses.
Volatility returnsVolatility returns
The scale of many banks' liabilities from the troubled US sub-prime mortgage market remains unknown, raising fears about their financial position.The scale of many banks' liabilities from the troubled US sub-prime mortgage market remains unknown, raising fears about their financial position.
Two German banks have already revealed huge losses stemming from sub-prime investments, while BNP Paribas suspended three investment funds last month after it said the liquidity crisis meant it was unable to calculate their value.Two German banks have already revealed huge losses stemming from sub-prime investments, while BNP Paribas suspended three investment funds last month after it said the liquidity crisis meant it was unable to calculate their value.
It seems very clear that in the US there will be an impact on the real economy William Rhodes, Citigroup We have taken decisions where and when appropriate Jean-Claude Trichet, ECB president
The ECB made an additional 42bn euros (£28bn; $57bn) in credit available on Thursday.The ECB made an additional 42bn euros (£28bn; $57bn) in credit available on Thursday.
It has already pumped billions into the money markets in the past month to try to soothe credit worries, but admitted on Wednesday that the scarcity of liquidity was still a problem. It has already pumped billions into the money markets in the past month to try to soothe credit worries, but has acknowledged that the scarcity of liquidity is still a problem.
"Volatility in the euro money market has increased and the ECB is closely monitoring the situation," the ECB said, adding it "stood ready to contribute to orderly conditions". "We must care for the money markets functioning in a correct and appropriate fashion," the bank's president Jean-Claude Trichet said following the latest credit move.
The Bank of Australia also intervened on Thursday to boost liquidity after a number of banks said they would state the value of special investment vehicles (SIVs) - many of which are suspected of being heavily exposed to riskier home loans - on their balance sheets. "We have done that in a very expeditious and successful fashion. We have taken decisions where and when appropriate."
The twin moves came a day after the Bank of England increased the amount of cash banks could deposit with it and gain access to at short notice. The move came a day after the Bank of England increased the amount of cash banks could deposit with it and gain access to at short notice.
Inter-bank lending rates - the rate at which banks borrow from each other over a three-month period - have risen to six-year highs as the liquidity crisis deepens.Inter-bank lending rates - the rate at which banks borrow from each other over a three-month period - have risen to six-year highs as the liquidity crisis deepens.
The main three-month London Libor rate, the standard by which such lending takes place, has risen to more than a percentage point above the Bank of England base rate.The main three-month London Libor rate, the standard by which such lending takes place, has risen to more than a percentage point above the Bank of England base rate.
Normally, the spread would be less than half a point, making banks' customary short-term borrowing to keep money flowing much more expensive and hitting potential profits.Normally, the spread would be less than half a point, making banks' customary short-term borrowing to keep money flowing much more expensive and hitting potential profits.
Central banks want to provide alternative, cheaper sources of credit.Central banks want to provide alternative, cheaper sources of credit.
Economic impactEconomic impact
Analysts believe the ECB's latest intervention means it is even less likely to adjust interest rates from their current 4% mark when it meets later on Thursday.Analysts believe the ECB's latest intervention means it is even less likely to adjust interest rates from their current 4% mark when it meets later on Thursday.
Recent decisions by Australia and Canada to freeze rates reflected growing concerns that a prolonged credit squeeze could damage global economic growth.Recent decisions by Australia and Canada to freeze rates reflected growing concerns that a prolonged credit squeeze could damage global economic growth.
The scale of bank's liabilities to the US is a matter of debate The scale of banks' liabilities to the US is a matter of debate
This view was reinforced by comments by the OECD on Wednesday, which said the US housing slump would lead to a "substantial" slowdown in its economy later this year.This view was reinforced by comments by the OECD on Wednesday, which said the US housing slump would lead to a "substantial" slowdown in its economy later this year.
But opinion remains divided on the likely scale of the fallout from the sub-prime crisis.But opinion remains divided on the likely scale of the fallout from the sub-prime crisis.
William Rhodes, a senior executive with US banking giant Citigroup, said on Thursday that he was "very concerned" about what he was seeing in financial markets.William Rhodes, a senior executive with US banking giant Citigroup, said on Thursday that he was "very concerned" about what he was seeing in financial markets.
"It seems very clear that in the US there will be an impact on the real economy," he said."It seems very clear that in the US there will be an impact on the real economy," he said.
But the World Bank's chief economist said that the current upheavals were likely to die down within a couple of months with little or no long-term repercussions.But the World Bank's chief economist said that the current upheavals were likely to die down within a couple of months with little or no long-term repercussions.
"There will be a very small impact of the sub-prime crisis and it will be over in a couple of months," Francois Bourguignon told an Indian newspaper."There will be a very small impact of the sub-prime crisis and it will be over in a couple of months," Francois Bourguignon told an Indian newspaper.