Anxious Central Banks Pump Billions More into Markets

Central banks in Europe and Japan provided $160 billion in liquidity.

Central banks pumped billions into money markets for a second day on Sept. 16 as efforts intensified to stop the demise of Lehman Brothers turning the year-old credit crunch into a credit freeze. A day after Lehman Brothers filed for bankruptcy and Merrill Lynch, another Wall Street titan once considered invincible, was sold, central banks in Europe and Japan provided a desperately needed $160 billion in liquidity.

Total injections since the weekend are now approaching $300 billion.

With insurance giant AIG scrambling to prevent its own collapse -- showing that the end of Lehmans is not the end of the crisis -- the money is needed to keep banks lending to each other and therefore to firms and individuals. Sources close to AIG, the biggest insurer in the U.S. with operations worldwide, were quoted as saying it might go bankrupt if it could not raise massive new finance by Sept. 17.

Share prices fell for a second day. In Europe shares fell by 1.44% in morning trading in London, 1.45% in Frankfurt and 0.71% in Paris. This was less heavily than on Sept. 15, but banking shares were again hard hit.

The European Central Bank said it allotted 70 billion euros (US$100 billion), more than double the 30-billion-euro injection it had provided on Sept. 15.

It also said it had lent 150 billion euros to commercial banks in a regular weekly refinancing operation in which markedly higher lending rates paid testament to increased market tensions.

The Bank of Japan meanwhile carried out two injections, the first of 1.5 trillion yen (US$14 billion) and the second of 1.0 trillion yen.

In Britain, the Bank of England injected 20 billion pounds (US$35.9 billion), four times the total on Sept. 15.

Switzerland's central bank said it would supply liquidity "in a flexible manner and generously" to money markets. On Sept. 15 the Swiss National Bank injected twice as much liquidity as usual to the market.

All eyes were on the what the U.S. Federal Reserve would do next after it had provided $70 billion in extra liquidity on Sept. 15. There was widespread speculation that the U.S. central bank might reverse its policy and cut interest rates to prevent the financial system from toppling and dragging the economy down with it.

Dominique Strauss-Kahn, the head of the International Monetary Fund, said on Sept. 16 the current international credit crisis was "unprecedented" but cautioned against panic.

Copyright Agence France-Presse, 2008

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