Central Banks Add $71 Billion to Ease Credit Squeeze

By Gabi Thesing

Sept. 19 (Bloomberg) -- Europe's main central banks lent $71 billion as part of a coordinated effort with the U.S. Federal Reserve to ease a credit squeeze.

The European Central Bank poured $40 billion dollars into the markets while the Bank of England allotted $20.8 billion out of $40 billion offered and the Swiss National Bank added $10bn. The ECB's and the SNB's auctions were oversubscribed. The Fed yesterday almost quadrupled to $247 billion the amount of dollars central banks can auction around the world.

Stocks from London to Shanghai recouped some of the losses from four straight days of declines after the U.S. government started planning new laws to halt the credit-market meltdown and financial regulators cracked down on short sellers.

The U.S. government's ``proposals finally address the root cause of the problem,'' said James Nixon, an economist at Societe Generale SA in London. ``The economic impact at this stage is difficult to gauge, but the boost in sentiment, as seen by the stocks rallies this morning, cannot be overstated.''

Europe's Dow Jones Stoxx 600 Index rose the most since data for the index began in 1987. Russia's RTS Index jumped 16 percent after a two-day suspension and President Dmitry Medvedev's pledge of $20 billion to prop up the market. The MSCI Asia-Pacific Index rebounded from a three-year low.

Cheaper Money

Money-market rates tumbled today on the coordinated efforts between central banks and lawmakers. The London interbank offered rate, or Libor, for overnight dollar loans fell 59 basis points to 3.25 percent today, after sliding 119 basis points yesterday, according to British Bankers' Association data.

When Lehman Brothers Holdings Inc. filed for bankruptcy this week it was the latest casualty in the yearlong credit crisis sparked by record loan defaults on mortgages to U.S. households with a poor credit history. More than $19 trillion was wiped off global stock-market value since Oct. 31 as more than $500 billion in credit losses and writedowns at banks pushed the world economy toward a recession.

U.S. Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke yesterday proposed moving troubled assets from the balance sheets of American financial companies into a new institution. The initiative is aimed at removing the devalued mortgage-linked assets at the root of the worst credit crisis since the Great Depression. The Treasury said today it will use as much as $50 billion to insure money-market mutual holdings.

Against Short Selling

Financial regulators in the U.S. and U.K., attorneys general in New York, Texas and Connecticut, and the three largest U.S. pension funds began cracking down on short sellers this week.

Short sellers try to profit by betting stock prices will fall. In a short sale, traders borrow shares from their broker that they then sell. If the price drops, they buy back the stock, return it to their broker and pocket the difference.

The ECB offered commercial banks extra euro funding overnight three times this week after the cost of borrowing in euros rose. The Bank of England and the SNB also held additional liquidity rounds in their own currencies this week. Central banks in Japan and Australia have pumped some $113 billion into money markets this week.

Dollar swap lines between the Fed and other central banks were first established in December when officials joined forces to boost dollar liquidity around the world after interest-rate reductions in the U.S., the U.K. and Canada failed to ease concerns about bank lending. The Fed increased its link with the ECB in July.

To contact the reporter on this story: Gabi Thesing in Frankfurt at gthesing@bloomberg.net