Money markets cautiously welcome sweeping U.S. plans

By Jamie McGeever

LONDON (Reuters) - The deep freeze that paralyzed money markets this week thawed on Friday after U.S. authorities unveiled a sweeping range of measures to ease the financial crisis, bringing interbank borrowing rates and spreads down from historic levels.

The overnight cost of borrowing dollars fell, while the premiums over government rates and interest rate swaps spreads -- both key measures of risk aversion and financial market stress -- also fell steeply.

The cost of three-month dollars also eased, with ICAP's New York Funding Rate falling to 3.3687 percent from Thursday's 3.7125 percent.

The Treasury said on Friday it would use $50 billion (27.3 billion pounds) to back money market mutual funds in the $3.5 trillion sector whose value falls below $1, and the Federal Reserve said it will lend even more cash directly to institutions to buy certain assets from money market funds.

This comes as U.S. financial and Congressional leaders are in talks to create a taxpayer-funded entity to mop up the toxic assets infecting banks' balance sheets, and follows a $180 billion dollar liquidity provision from the Fed and other global central banks on Thursday.

While the long-term impact of lumbering the taxpayer with hundreds of billions of dollars of liabilities could be serious for U.S. fiscal health, analysts gave an initial welcome to the moves.

"Ring-fencing the money market funds would produce the double benefit of protecting private sector savings and averting a renewed spike in the interbank money market crisis," said Lena Komileva, G7 strategist at Tullett Prebon in London.

Jim O'Neill, chief global economists at Goldman Sachs, said the measures pulled financial markets back from the brink. And analysts at Bridgewater Associates, a Connecticut-based fund management firm with $140 billion in global investments, said the safety net will reduce the risks of banking sector meltdown.