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Last Updated: Tuesday, 18 December 2007, 23:16 GMT
ECB lends $500bn to lower rates
Euro notes

The European Central Bank has allocated 348.7bn euros ($502bn; 249bn) to banks at a below-market rate in a refinancing move to ease tightened credit markets.

It is one of five central banks that have injected billions in emergency cash into money markets.

The aim is to cut the cost of lending between retail and commercial banks, which has jumped in the past few weeks.

All banks with enough collateral, and which submitted bids of at least 4.21%, received funds from the ECB.

The ECB said 390 banks across the eurozone had sought the funding.

The move - making the extra cash available over the next two weeks -will ease fears of a credit meltdown over the Christmas period, when banks need extra cash.

Cutting interbank rates

The hope is that lower interbank rates will mean that banks will also be able to make more funds available at cheaper rates to companies and individuals.

The ECB's action succeeded in cutting short-term lending rates, with the two week euro Libor rate falling sharply to 4.4%.

However, the rate still remains above the 4% ECB refinancing rate.

The two-week ECB refinancing operation is the first time it has said it would offer banks unlimited funds, above a certain interest rate, since 9 August when the credit crisis started.

The size of the offer surprised some analysts.

"The sheer magnitude of the operation caught the market off guard," said Win Thin, a senior currency strategist at Brown Brothers Harriman.

Central bank coordination

The main reason banks have been unwilling to lend to each other is a downturn in the US property market.

A surge in mortgage defaults and bad debts has forced many banks to cut the value of their mortgage investments, costing them billions of dollars.

As a result, the banks fear that they might need any spare cash they have to cover their losses.

Central banks have also been boosting liquidity into the banking sector to ensure banks keep offering credit to businesses.

On Monday, the US Federal Reserve made $20bn available through auction, though it did not say how many banks took advantage of the extra money.

And on Tuesday the Bank of England is set to lend more than another 10bn in funds.

As well as the Bank of England, the Fed, and the European Central Bank, the national banks of Canada and Switzerland are also involved in the funding plan.

But some analysts say that until the banks reveal the true scale of their potential losses, the central banks will be unable to do much to ease the credit crunch.



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