The European Central Bank, in an unprecedented response to a sudden demand for cash from banks roiled by the subprime mortgage collapse in the U.S., loaned 94.8 billion euros ($130.2 billion) to assuage a credit crunch.
The overnight rates banks charge each other to lend in dollars jumped to the highest in six years. The so-called dollar London interbank offered rate rose to 5.86 percent today from 5.35 percent and in euros gained to 4.31 percent from 4.11 percent.
The ECB's response to the fastest increase in the dollar bank rate since June 2004 signals that lenders are reducing the supply of money as losses triggered by the U.S. mortgage slump spread worldwide. BNP Paribas SA halted withdrawals from three investment funds today and Dutch investment bank NIBC Holding NV said it had lost at least 137 million euros on subprime investments, reversing evidence yesterday that credit markets were stabilizing.
``Liquidity in the market has completely dried up as investors aren't recycling their money back because of subprime concerns,'' said Saher Bin Jung, a trader on the commercial paper desk at Commerzbank AG. ``Levels have shot up dramatically since yesterday as issuers are trying to entice investors back.''
The ECB said today it provided the largest amount ever in a single so-called ``fine-tuning'' operation, exceeding the 69.3 billion euros provided on Sept. 12, 2001, the day after the terror attacks on New York.
Stocks, Treasuries
The announcement added to investor nervousness, pushing Europe's Dow Jones Stoxx 600 Index down 1.9 percent, while the Standard & Poor's 500 Index futures expiring in September lost 20.9 to 1,483.0. U.S. Treasury notes gained for the first time in four days as investors sought the safest assets, cutting yields on two-year notes by 16 basis points, or 0.16 percentage point, to 4.50 percent.
BNP Paribas, France's biggest bank, stopped investors withdrawing from funds with 2 billion euros of assets because it couldn't ``fairly'' value their holdings after concern over U.S. subprime mortgage losses roiled credit markets.
Three-month dollar Libor rose to 5.5 percent from 5.38 percent.
Federal Reserve spokesman David Skidmore declined to comment on the increases in overnight money-market rates.
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