ECB Leads Push to Flood Banks With Unlimited Dollars

By Simone Meier

Oct. 15 (Bloomberg) -- The European Central Bank, Bank of England and Swiss National Bank loaned financial institutions a combined $254 billion in their first tenders of unlimited dollar funds, stepping up efforts to ease strains in markets.

The Frankfurt-based ECB lent banks $170.9 billion for seven days at a fixed rate of 2.277 percent. The Bank of England allotted $76.3 billion and the Swiss central bank $7.1 billion at the same rate, also for a week.

Policy makers are trying to unfreeze credit markets and get banks lending to each other again after a crisis of confidence culminated last week in the biggest stock-market sell-off since 1933, threatening to tip the world into a recession. Money-market rates have started to decline, suggesting the measures may be working.

The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars fell 9 basis points to 4.55 percent today, according to the British Bankers' Association. It was its third consecutive decline.

Asian money-market rates fell earlier today after the Bank of Japan said it will also offer unlimited dollar funds, with its first tender to be held on Oct. 21, and Hong Kong agreed to guarantee all bank deposits.

In the U.S., the government has earmarked $250 billion to purchase stakes in the nation's largest financial companies including Goldman Sachs Group Inc. to prevent a banking collapse. The U.K. is spending 50 billion pounds ($87 billion) on bank stakes, while France, Germany, Spain, the Netherlands and Austria have pledged 1.3 trillion euros to shore up their banking systems.

`No Quick Fix'

``There is no quick fix, confidence is gone and it will take quite a while for it to return,'' said Thorsten Polleit, an economist at Barclays Capital in Frankfurt. ``I doubt that things will get back to where they were before the crisis.''

The bankruptcy of New York-based Lehman Brothers Holdings Inc. last month precipitated the latest chapter of the 14-month crisis, causing banks to stop lending to each other out of concern they may not get their money back.

The world's largest financial companies have posted more than $635 billion in writedowns and credit losses since the start of last year after the U.S. housing market slumped.

The ECB, Bank of England and SNB on Oct. 8 joined the U.S. Federal Reserve in a global round of coordinated interest-rate cuts as the economic outlook deteriorated.

The Fed announced on Oct. 13 that the world's largest central banks would offer unlimited dollar loans with maturities of seven days, 28 days and 84 days. All of the previous dollar swap arrangements between the Fed and other central banks were capped.

European leaders meet today in Brussels to discuss the next steps in responding to the market meltdown.

``When a fire's burning in the global financial markets, it has to be put out, even if it's a case of arson,'' German Finance Minister Peer Steinbrueck said in Brussels today. ``But then the arsonists have to be held responsible and spreading the flames must be outlawed.''

To contact the reporter on this story: Simone Meier in Frankfurt at smeier@bloomberg.net.