Talk about legitimising the perception of a crisis. The ECB’s €94.8bn injection of liquidity, as part of an unlimited cash offer to borrowers, sent European equity markets tumbling and US markets steeply lower at the open.
This unscheduled intervention by the bank, the first since the aftermath of September 11, 2001 and the largest in the bank’s history, came after overnight rates rose to 4.7 per cent, their highest in nearly six years – and after BNP Paribas delivered the latest nugget of bad news related to the fallout of the problems in subprime mortgage lending in the US market.
London’s FTSE 100 dropped 140.8 points or 2.5 per cent to 6,236.7. The DAX 30 in Frankfurt fell 163.8 points or 2.4 per cent to 7444.11 and in Paris the CAC 40 slumped 154.9 points or 3 per cent to 5,575.4.
“This is what central banks are there for, to be the lender of last resort,” says Lombard Street Research‘s Gabriel Stein. “They’ve seen the interest rate pushed up to a level they don’t like and acted on it.”
Mr Stein reiterated his comments from earlier in the week that with a track record of piling into US securities at or near their peak, the bad news flow in Europe related to subprime looked set to continue.
He added on Thursday: “There is no Trichet put. The ECB is saying, ‘you got into this….it’s your problem. We will do what we as a central bank we should do: provide liquidity. But you’re going to pay the going rate for it.’”