You're back to normal, ECB chief tells markets, but they disagree

Section:

ECB Chief Fails to Reassure Markets

By Ralph Atkins, Michael Mackenzie, and Paul J. Davies
Financial Times, London
Tuesday, August 14, 2007

http://www.ft.com/cms/s/019d9176-4a2c-11dc-95b5-0000779fd2ac.html

Renewed turmoil in global money markets sent stock prices falling around the world on Tuesday as traders ignored a declaration by Jean-Claude Trichet, European Central Bank president, that conditions were returning to normal.

Traders were particularly alarmed by signs that the market for asset-backed commercial paper -- which provides $1,500 billion in short-term borrowings for big companies -- was drying up.

The anxieties were exacerbated by dismal pronouncements from a variety of financial companies. UBS, the giant Swiss bank, issued a profit warning. Sentinel, a little-known US money manager with $1.5 billion in assets, told the Commodity Futures Trading Commission it would halt redemptions. Thornburg Mortgage, a US home lender that focuses on wealthy home buyers, delayed payment of its dividend, triggering a 47 per cent plunge in its share price.

Drew Matus, economist at Lehman Brothers, said: "We are in a minefield. No one knows where the mines are planted and we are just trying to stumble through it."

In an attempt to calm investors, Mr Trichet, speaking before US markets opened, said conditions "have gone progressively back to normal." The bank is expected to press ahead with another increase in its main interest rate next month. The ECB and central banks pumped funds into the interbank lending markets at the end of last week after investors deserted short-term debt markets, making it much harder to raise short-term funds. The ECB on Tuesday made its fourth intervention since last Thursday. The E7.7 billion ($10.4 billion) injected was down from E47.67 billion on Monday and E95 billion put in on Thursday.

The Bank of Japan even attempted to reduce liquidity on Tuesday, draining Y1,600 billion ($13.6 billion) from the banking system, equivalent to the amount it had poured in over two days beginning on Friday.

In the US, the overnight money market seemed liquid. The Fed Funds rate fell below 4 per cent at one point, significantly below the Federal Reserve's target of 5.25 per cent and well below the benchmark three-month London interbank (Libor) rate of 5.53 per cent. The two rates are normally much closer.

Stocks gained in Asia and early in the session in Europe, but the fresh wave of liquidity concerns triggered a new round of selling once Wall Street opened.

By the close in New York, the S&P 500 index was down 1.8 per cent. The FTSE Eurofirst closed down 1.3 per cent and the FTSE 100 was 1.2 per cent lower. Tokyo's Nikkei 225 Average ended 0.3 per cent higher.

The concerns about asset-backed commercial paper were triggered by news that Coventree, a listed Canadian investment manager that is a heavy user of such funding, was forced to draw on C$700 million (US$656 million) worth of liquidity facilities from banks.

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