Central banks dish out more cash as money markets freeze

By Marc Jones and Wayne Cole FRANKFURT/SYDNEY (Reuters) - Central banks across the world scrambled to meet desperate demand for cash on Friday, with Europe's big three offering billions of one-week dollars for the first time to break a quarter-end money market logjam. As the financial crisis went from bad to worse, the European Central Bank stumped up $35 billion (19 billion pounds), the Bank of England offered $30 billion and the Swiss National Bank put up $9 billion of one week money. Demand from cash-hungry banks, particularly for the ECB cash, was hefty as lending between banks on money markets remained virtually paralysed. "There is no term lending of note between counterparties. Any term funding there is coming from the central banks," said Meyrick Chapman, rates strategist at UBS. In Asian time, the central banks of Japan, Australia and South Korea also pumped in cash to lubricate their markets. As negotiations over an unprecedented $700 billion U.S. bailout faltered, news that Washington Mutual, the largest U.S. savings and loan bank, was taken over by authorities and its deposits auctioned off only added to the thirst for liquidity. In early London trade, the interbank cost of borrowing dollars for three months was indicated at the upper end of a wide range between 3.7 and 4.8 percent. And the key three-month Euribor rate jumped to the highest level since early 1995, hitting 5.142 percent. Stress was exacerbated by the looming quarter-end. Any three-month lending now will mature over the Christmas period, when markets are either closed or highly illiquid. "These operations are designed to address funding pressures over quarter-end," said a statement from the Federal Reserve, which expanded its dollar swaps facilities with other central banks. "Central banks continue to work together closely and are prepared to take further steps as needed to address the ongoing pressures in funding markets." HIGH DEMAND The ECB's one-week dollar tender was swamped with demand -- the $35 billion attracted bids totalling a whopping $82.495 billion. But only $4.9 billion of the SNB's $9 billion was taken up. The Bank of England received bids worth 1.06 times the amount on offer in its one-week repo of $30 billion -- the first time UK demand for dollars has exceeded the amount on offer. But the sterling money market at the three-month level remains under much more strain, prompting the BoE to offer 40 billion pounds around that maturity next week, with more to come, a move analysts hailed as welcome ... and overdue. "This is a huge step forward and reflects the fact that credit markets have almost totally seized up over the last week and a half," said Philip Shaw, chief economist at Investec, of the BoE's pending sterling offers. With commercial banks everywhere hoarding cash, central banks were almost the only game in town. Unease intensified after Republicans balked at Treasury Secretary Henry Paulson's plan to buy bad debt from banks and instead floated an idea of their own for mortgage insurance. On Thursday, three-month U.S. dollar LIBOR shot up nearly 30 basis points to 3.769 percent -- its highest level since January and nearly 2 percentage points above the expected federal funds rate in three months time. The Reserve Bank of Australia (RBA) launched its first ever repurchase operation in U.S. dollars and all $10 billion on offer was hungrily snapped. The RBA established a U.S. dollar swap line with the Fed earlier in the week. In South Korea, the Finance Ministry said it would inject $10 billion or more into the local swap market until the middle of October to stave off persistent dollar funding shortages. The RBA and the Bank of Japan also kept adding extra cash to their own banking systems on Friday. Yet the sums on offer paled into insignificance compared to the Fed's largesse -- U.S. institutions borrowed from the Fed $188 billion per day on average in the latest week, almost four times the previous record. (Writing by Mike Peacock; editing by Patrick Graham) (Additional reporting by Matt Falloon in London, Chikako Mogi in Tokyo, Vidya Ranganathan and Eric Burroughs in Singapore, Lee Shin-Hyung in Seoul and Ho Binh Minh in Hanoi, Sven Egenter in Zurich, Editing by xxxxx xxxxx) ʘ