ECB Makes Huge Loan to Increase Liquidity

FRANKFURT -- The European Central Bank on Tuesday set its credit tap wide open, pumping a whopping 350 billion euros -- the equivalent of more than half a trillion dollars -- into money markets to keep banks from Finland to France flush with the cash they need to operate.

The move, along with another liquidity infusion by the Bank of England, was aimed at keeping jittery markets calm amid a credit squeeze caused by the U.S. subprime crisis. So far, it seemed to be soothing stock investors, with most equity markets in Europe and the United States higher.

Banks have been afraid to loan each other money for short-term needs amid the credit squeeze, driving up short-term rates. The central banks are sharply stepping up their normal role as providers of liquidity, a job that usually gets far less attention than their interest rate moves.

The ECB, which oversees monetary policy among the 13 countries that use the euro, said it allocated the exceptionally large amount of 348.6 billion euros in its main refinancing operation, a process that also boasts a duration of 16 days, meaning it will not mature until after the New Year, on Jan. 4.

The bank said its lowest, or marginal bid, rate that it accepted was 4.21 percent, matching the weighted average allotment.

The ECB unusually pledged to satisfy any and all bids at or above 4.21 percent -- the weighted average allotment rate of the main refinancing operation that settled on Dec. 12 -- at the main refinancing tender Tuesday, to smooth out continued heavy demand for liquidity.

The ECB also said that 390 banks and financial institutes submitted bids totaling 377.1 billion euros at rates of 4 percent to 4.45 percent.

That maximum bid rate left analysts puzzled about why the banks that bid did so at that level, given that on Monday, the ECB said it would honor all bids at or above 4.21 percent -- the weighted average allotment.

"It's a huge amount, really significant ... but liquidity needs are also significant," Nathalie Fillet, a strategist at BNP Paribas in London told Dow Jones Newswires.

But, warned Tony Crescenzi of Miller Tabak, the large amount sought by banks may lead to fears that funding needs are still problematic.

"It is a simple case of supply and demand. In essence, therefore, in light of the injections it could be said that the central banks are merely forming a bridge to a time when it is hoped that problems at the root of the short-term funding problem will begin to diminish," he said.