Reply #47: CREDIT WRAPUP 3-Fed,ECB vow to offset Y2K-style year end squeeze

[Ghost Dog]

http://www.reuters.com/article/marketsNews/idINL2654182720071126?rpc=611

LONDON, Nov 26 (Reuters) - The U.S. Federal Reserve and European Central Bank on Monday sought to calm stressed money markets by promising banks extra money to tide them through a likely severe year-end cash squeeze, mirroring action conducted around the turn of the millennium.

As fallout from the U.S. subprime mortgage collapse spreads and banks hoard cash to offset balance sheet strains, interbank lending rates in euros, dollars and sterling have surged to well above central bank targets again over the past week -- forcing the Fed and ECB to assure banks of available funds.

The ECB repeated a statement first issued late Friday of its intent to ease the year end strain, where two-month euro London interbank rates (Libor) are at their highest since 2001 and three-month rates marked their biggest one-day jump on Monday since the credit crisis erupted in August.

"The ongoing process of risk appraisal and repricing in financial markets could be more protracted than previously expected and could have a broader impact on financial markets and the economy," ECB Vice President Lucas Papademos said on Monday in a speech at the Cypriot central bank.

The Fed later echoed the ECB promise of extra funds and said it would conduct a series of term repurchase agreements extending into the new year, the first for about $8 billion set for Nov 28 and maturing on Jan 10, 2008.

"Given the high level of attention focused on the coming year end we hope to reassure market participants of our commitment to providing sufficient balances at that time by starting to provide those balances now," said a New York Fed official who declined to be named. Two-month and three-month dollar Libor rose to their highest in a month on Monday. At more than 50 basis points, the spread between three-month dollar Libor and the 4.5 percent Fed funds target rate was at the widest since the crisis began.

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