ECB Injects $500B; Interbank Rate Plummets

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The European Central Bank said Tuesday it loaned $500 billion (€348 billion) to banks, making good on its offer of "unlimited funds" (ECB's Gift of Unlimited Liquidity) in conjunction with coordinated action announced by five central banks last week (full story). The ECB said in a statement late Monday that it would satisfy all bids for two-week funding at or above 4.21%. The €348.6 billion two week loans -- double the anticipated amount -- resulted in a sharp decline in euro-based LIBOR rates. The auction's success may signal that policy makers, in their first coordinated action since Sept. 11, 2001, are making headway in reviving lending between banks, helping bankroll banks out of a problem they themselves created. Ryan Detrick, strategist at Schaeffer's Investment Research, said, "This is one of the biggest injections we've seen. Five hundred billion -- that's definitely trying to fix things."

Others were unconvinced: "Today’s generous operation does not make banks love each other any more, so it does not solve the illiquidity mess in the banking system," High Frequency Economics' Carl Weinberg wrote.

Few are calling this the end of the credit crunch. Markets gained in early trading, quickly reliquished those gains, and as of 2:38 p.m. are up again. The dollar gained against other major currencies; gold prices rose; crude was down. The two-week euro-area interbank offered rate dropped a record 50 basis points to 4.45%, the European Banking Federation said today.

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