European Central Banks Offer More Dollars From Fed

By Simon Kennedy and Gabi Thesing

Sept. 26 (Bloomberg) -- European central banks will for the first time let banks borrow dollars from them for a week in an effort to ease drum-tight money markets at the end of the quarter.

With the cost of borrowing dollars over three months yesterday jumping by the most since 1999, the European Central Bank, Bank of England and Swiss National Bank said today they will auction a total of $74 billion in one-week funding. The Federal Reserve assisted by providing the ECB and SNB with access to $13 billion more of its currency, boosting the amount of dollars it makes available to counterparts to $290 billion.

``These operations are designed to address funding pressures over quarter end,'' the central banks said in statements. ``Central banks continue to work together closely and are prepared to take further steps as needed to address the ongoing pressure in funding markets.''

The central banks are tweaking the timeframes over which they auction dollars as banks remain reluctant to lend to each other even after the Fed more than quadrupled the amount of dollars that can be sold around the world. Concern a U.S. rescue plan to ease the worsening financial crisis won't be implemented fast enough may strain markets again today.

``The money markets will remain tense until the U.S. package is agreed and starts to be implemented,'' said Holger Schmieding, chief European economist at Bank of America Corp. in London.

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Having sold dollars for a day for the first time last week, the ECB will today offer $35 billion in funds for a week. It will reduce its sale of overnight dollars by $10 billion to $30 billion. The Swiss National Bank will auction $9 billion over seven days, while paring the amount it offers overnight to $7 billion from $10 billion.

The Bank of England, which has held six overnight dollar auctions for $40 billion, will now sell $30 billion for a week and $10 billion in overnight auctions. The U.K. bank will also hold weekly auctions for pounds against extended collateral including mortgage securities.

Central bankers are stepping in as a source of dollars as $522 billion in writedowns and losses tied to the U.S. mortgage market and questions about the credit-worth of counterparties prompt bankers to hoard cash to meet their own funding needs. Banks in the euro region deposited more than 1 billion euros with the ECB for a sixth day running yesterday, the longest such stretch since the introduction of the euro in 1999.

Swap Lines

The Fed is providing counterparts with dollars through so- called swap lines, enabling them to auction the U.S. currency in their own markets in return for collateral. It last week extended links established in December with the ECB and Swiss National Bank by $70 billion, and created $110 billion in new facilities with central banks in Japan, the U.K. and Canada. Yesterday, it agreed to channel $30 billion to Norway, Sweden, Denmark and Australia.

The financial crisis, which deepened this month after Lehman Brothers Holdings Inc. filed for bankruptcy and the U.S. government took over American International Group Inc., is entering a new stage as lawmakers squabble over a $700 billion rescue of the U.S. banking system. Negotiations stalled yesterday after Republicans in the U.S. House of Representatives undercut the Bush administration and left it to congressional leaders to hammer out a compromise.

Concern the plan may be diluted yesterday spurred money- market rates around the world. The three-month London interbank offered rate, or Libor, that most banks charge each other for dollar loans rose 29 basis points to 3.77 percent.

To contact the reporters on this story: Simon Kennedy in Paris at Skennedy4@bloomberg.netGabi Thesing in Frankfurt gthesing@bloomberg.net;