7th Dec 2022

ECB releases €95 billion to fend off credit crunch

The European Central Bank (ECB) has poured around €95 billion into the eurozone banking system to calm market jitters following a credit crunch in the US market over high-risk mortgages.

For Thursday only, the the ECB opened its funds to banks in the 13-nation eurozone at a rate of 4 percent.

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According to a report in Forbes news agency, some 49 banks took up the offer to various amounts, running in total to €94.8 billion - it is the biggest loan in the bank's history.

"The ECB notes that there are tensions in the euro money market notwithstanding the normal supply of aggregate euro liquidity," it said in a statement.

This is the first time the ECB has felt compelled to intervene in the markets since the days following the terrorist attacks in the US in September 2001.

The move was prompted after investors panicked about the potential losses from the US subprime sector after BNP Paribas, a major French bank, froze payments on three funds invested in the sector.

Ian Richards, European equity strategist at ABN Amro, told UK daily the Independent that the ECB's payout was a "reflection of the fact that the sub-prime issues will not be constrained to the US financial sector. As the financial sector across Europe shows its hand over the next weeks and months we will see where the exposure exists."

The ECB is acting as the lender of last resort. The scale of intervention we have seen today is quite large," he continued.

There has been speculation that the ECB may have acted because it has knowledge of problems that have still to come to light.

Earlier this month, the Financial Times reported Jochen Sanio, head of Germany's financial regulator, as having warned about the worst banking crisis facing Germany since 1931 - this followed a German government rescue of domestic lender IKB, involved in subprime investments.

Sub-prime mortgages are those loans made to borrowers who would not usually qualify for the normal market interest rates, often due to a poor credit history.

They are riskier both for the borrower and lender because of this combination of higher interest rates and weak credit history.

The US Federal Reserve also stepped in with emergency funds on Thursday. The crisis in the US started to escalate recently because of the collapse of many mortgage lenders in the subprime sector.

The moves on both sides of the Atlantic are a bid to try and stop a cash flow crunch in the sector from spreading to other parts of the economy.

Sarkozy calls for more market monitoring after recent turmoil

After days of turbulence on global markets prompted by US mortgage sector problems, questions are being asked about whether more could have done to avoid the crisis. The EU is looking into the role played by rating agencies while France has called for greater financial transparency.

EU and US central banks consider currency swap

Amid fears that US mortgage market problems could prompt a worldwide credit crunch, the European Central Bank is expected to continue pumping funds into the eurozone banking market today.

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