The European Central Bank was forced today to wade into the eurozone’s money markets and inject €94.8 billion of funds to stabilise overnight interest rates after a new bout of credit jitters saw these spike upwards.

In a highly unusual move, the ECB stepped in to offer banks immediate and unlimited access to short-term cash at its main 4 per cent lending rate after overnight money market interest rates suddenly leapt to 4.7 per cent, their highest since October 2001, in the turbulent aftermath of September 11 terrorist attacks on the US.

“This liquidity-providing fine-tuning operation aims to assure orderly conditions in the euro money market. The ECB intends to allot 100 per cent of the bids it receives,” the Frankfurt-based central bank said in a statement.

The ECB’s move successfully brought overnight eurozone rates back down to more normal levels but immediately served to amplify anxieties across financial markets over the latest turbulence caused by a deepening credit squeeze on both sides of the Atlantic.

BACKGROUND

• Elephant slumps in wake of crunch

• Heads on the block, investors call for change

• Credit crunch forces Delek to leave property deal

• US rate cut looks certain after new data

• Bank of America to axe 3,000 after 'our errors'

BACKGROUND

• More pain for private equity industry

• Russian state bank poised to boost liquidity

• House prices‘to stay flat for years’

• Will soaring oil pump up inflation?

• US bank slump goes on

Black clouds loom on horizon

For the first time in 15 years, I am seriously worried about the outlook for the economy, the housing market and sterling

Float on the job market

Don't believe the scary headlines. It's not the worst time to consider a career in banking

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• Sub-prime hit German bank ousts finance chief

In London, the FTSE 100 index fell more than 150 points in early afternoon trading, while bourses across Europe also saw shares tumbling. Wall Street plunged 160 points in early trading.

In what looked like a transatlantic show of unity to help calm markets the US Federal Reserve quickly followed the ECB’s lead and also announced that it was adding extra liquidity to short-term money markets.

The Fed said that it would provide $12 billion of temporary reserves to the American banking system through 14-day security repurchase agreements. That was more than double the $5 billion of temporary reserves added through such “repo” agreements last Thursday.

In London, a spokeswoman for the Bank of England said that it had not intervened in markets as of lunchtime.

The disruption to markets in Europe was triggered after BNP Paribas, the French bank, announced the closure of three of its asset-backed credit funds, blaming a drying up of credit. BNP said that it was suspending trading in its Parvest Dynamic ABS, BNP ABS Euribor, and BNP Paribas ABS Eonia funds after the “complete evaporation” of market liquidity.

The German Bundesbank also denied that it was holding emergency talks to discuss problems at West LB, the government-controlled state bank.

The ECB’s intervention came just as its latest monthly bulletin sought to play down fears over a credit crunch, emphasising that “overall financing conditions remain favourable, money and credit conditions vigorous, and liquidity ample”.

Yesterday, Mervyn King, the Governor of the Bank of England, also played down the threat posed by recent market turbulence. “It is not an international financial crisis,” he said as he unveiled the Bank’s latest Inflation Report.

However, he noted that: “We don’t know whether these tremors in financial markets signal a more disruptive movement to come or constitute a gradual release of pressure on interest rate spreads that have built up over some time.

“So it’s impossible at this stage to judge just how large and how persistent this tightening of credit conditions is likely to be.”

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