The Political Battle Royal

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"I saw a flat cat the other day".

"How'd you know it was flat"?, asked a friend.

"The cat on top of him was pumping it up".

3rd Update: Europe Central Bks Pump Funds Into Bank System

September 15, 2008: 07:23 AM EST


LONDON -(Dow Jones)- In a coordinated move, major European central banks early Monday pumped extra short-term liquidity into the banking system after the latest Wall Street upheavals seized up interbank lending.

The European Central Bank Monday allotted EUR30 billion in a one-day liquidity-providing special refinancing operation after Lehman Brothers Holdings Inc. (LEH) said it intended to file for bankruptcy protection.

As banks scrambled for funds in nervous markets, the ECB said it received bids totaling EUR90.27 billion for its tender.

The action calmed some early market jitters. Overnight euro money market rates, which had shot up to a 2008 high of 4.94% at the opening from a friday close at 4.26%, fell back to 4.4% after the ECB action.

The Bank of England allocated GBP5.0 billion in additional funds on bids totaling GBP24.1 billion. The Swiss National Bank also injected fresh funds into its banking system Monday.

"The results of the one-day refinancing bill auction show that demand for liquidity is currently very high and highlights how fragile the current situation is," Royal Bank of Scotland economists Jacques Cailloux and Gareth Claase said in a note to clients. "The ECB will likely take note that the financial system remains starved of cash and that it might thus be forced to step in again," he said.

French Finance Minister Christine Lagarde on French radio Europe 1 early called upon European banks not to panic, saying that European central banks and other financial authorities all consulted over the weekend on how to prepare for Monday's markets.

"Mechanisms" to prevent any destabilization of European financial markets have been put in place, she said.

Germany's Finance Ministry, banking regulator BaFin, and the Deutsche Bundesbank also said they were in close contact with their international partners and German banks. They said that German bank exposure to Lehman was manageable.

The dollar fell against other currencies and European equity and Asian equity markets dropped on the Lehman announcement.

Other news of a funding shortfall at insurer American International Group Inc. (AIG), and the sale of Merrill Lynch & Co. (MER) to Bank of America Corp. (BAC) for $50 billion contributed to an uncertain picture as European markets woke up Monday.

European bond prices were tending higher on a safe-haven play and interbank money market borrowing rates soared at the start of trading. The opening raised concerns that the European banking system could suffer an acute liquidity shortage if banks declined to continue lending to each other on perceptions of rising default risks.

The ECB said in a statement is will closely monitoring money market conditions for signs of turmoil, following news that more U.S. banks are toppling after a year after the onset of the credit crisis rising from the U.S. subprime mortgage market.

"The ECB continues to closely monitor the conditions in the euro area money market," the ECB said. "The ECB stands ready to contribute to orderly conditions in the euro money market."

The Bank of England also issued similar assurances early Monday.

"Following the announcements overnight, the Bank of England will be monitoring carefully the conditions in sterling money markets and will take appropriate actions if necessary to stabilize those markets," the BOE said in a statement.

Switzerland's central bank is keeping a close eye on financial markets and is prepared to keep liquidity at a high level, a spokesman said.

"We are closely watching the development on financial markets," Swiss National Bank spokesman Werner Abegg said Monday.

"We are prepared to flexibly and generously supply the Swiss money market with liquidity," the spokesman said.

-By Terence Roth, Dow Jones Newswires; [phone]; terence.roth@ dowjones.com

(Nikki Houston, Natasha Brereton, Geraldine Amiel and Martin Gelnar contributed to this story)