London: The European Central Bank (ECB), in an unprecedented response to a sudden demand for cash from banks roiled by the subprime mortgage collapse in the US, loaned €94.8 billion (Rs5.29 trillion) to assuage a credit crunch, but analysts said the impact of the move on India would be minimal.
The overnight rates banks charge each other to lend in dollars jumped to the highest in six years. The London interbank offered rate (the benchmark rate for bank-to-bank loans) rose to 5.86% on Thursday from 5.35% and in euros gained to 4.31% from 4.11%.
ECB said it would provide unlimited cash as the fastest rise in overnight Libor since June 2004 signalled banks are reducing the supply of money just when investors are retreating because of losses from the US mortgage slump. BNP Paribas SA halted withdrawals from three investment funds on Thursday because the French bank couldn’t value its holdings. Stocks in the US and Europe fell and Treasury bonds rose, a turnaround from the past three days when investors concluded that credit market risks were abating.
“Liquidity in the market has completely dried up as investors aren’t recycling their money back because of subprime concerns,” said Saher Bin Jung, a trader on the commercial paper desk at Commerzbank AG. “Levels have shot up dramatically since yesterday as issuers are trying to entice investors back.”
ECB’s move would not have a major impact on the Indian market, said analysts. “We do not see any economic impact of these events on India, but in the near term, one may see India getting impacted because of capital re-allocation,” said Suresh Soni, director and CIO, Deutsche Asset Management India Pvt Ltd.
Analysts added that there was no need to panic—yet. In normal circumstances, the credit crunch would have hurt Indian firms seeking to raise money through overseas borrowings by either making such money more expensive or the simple lack of funds. But by placing curbs on external commercial borrowings earlier this week, the Reserve Bank of India has already curtailed the money-raising options for Indian companies, said Nandkumar Surti, CIO, fixed income, JP Morgan Asset Management India Pvt. Ltd.
ECB on Thursday said it provided the largest amount ever in a single so-called “fine-tuning” operation, exceeding the €69.3 billion provided on 12 September 2001, the day after the terror attacks on New York.
“Banks reacted to ECB’s ‘sale’ offer in a similar way one would react to a sale in a department store” and “got all the money they could,” said Ulrich Karrasch, a money market trader at HVB Group in Munich.
The US Federal Reserve added $12 billion in temporary reserves to the banking system on Thursday when it arranged 14-day repurchase agreements, or repos, about the amount analysts predicted. Just two days ago, the Fed said “tighter” credit conditions aren’t a threat to economic growth.
Fed spokesman David Skidmore declined to comment on the increases in overnight money-market rates.
The ECB’s announcement added to investor nervousness. The euro fell 0.9% to $1.3672, its steepest decline in more than a year. It dropped 2% versus the yen in the biggest slump in two years.
Concerns increased as BNP Paribas, France’s biggest bank, stopped investors withdrawing from funds with assets totalling €2 billion because it couldn’t “fairly” value their holdings after the sell-off in credit markets.
Dutch investment bank NIBC Holding NV also said it had lost at least €137 million on subprime investments.
In the US, the Dow Jones Industrial Average was trading at 13,518.44 at 9pm India time, down 1.02% from Wednesday’s close of 13,657.86. The Bombay Stock Exchange’s Sensex closed 1.4% down at 15,100.15.
For Bank of America Corp., the No. 2 US bank by assets, Thursday’s increase in overnight borrowing costs was the biggest since the Federal Open Markets Committee raised interest rates at the end of June 2004. For UBS AG in Zurich, it was the largest jump since Europe’s No. 1 bank by assets said in August 2004 that it may have overestimated its value-at-risk by more than 20%. Both banks said their overnight borrowing costs rose 65 basis points to 6%. Royal Bank of Canada and Barclays Plc. also said they’re paying 6%.
Developments in Europe and the US indicate that risk aversion among global investors is at a high and India could feel the pinch. “The credit market has come to a standstill. And nobody is willing to take risks at this point of time,” said Rajiv Anand, head of investments, Standard Chartered Bank.
“This is an old-fashioned credit crunch,” Chris Low, the chief economist at FTN Financial in New York, said in a report on Thursday. “This is not a small thing. A credit crunch, when the short-term credit markets seize up, is extraordinarily serious, almost always the precursor of a significant recession.”
Mint’s Rachna Monga contributed to this story.