E.U. Central Bank Injects More Cash as Markets Tumble

By John Ward Anderson
Washington Post Foreign Service
Saturday, August 11, 2007

PARIS, Aug. 10 -- European financial markets continued their sell-offs Friday amid continuing fear of a global credit crunch fueled by problems with U.S. mortgages, and the European Central Bank pumped funds into markets to shore up liquidity for a second day.

The bank injected the equivalent of $84 billion into the financial system Friday "to assure orderly conditions in the euro money market," it said in a statement. The Federal Reserve added $38 billion to markets, the Bank of Japan $8.5 billion and the Reserve Bank of Australia $4.2 billion, signaling broad concern among central bankers. On Thursday, the European bank made a $130 billion infusion and the Fed added $24 billion.

"The effect of U.S. subprime loans is spreading to financial markets around the world,'' Japanese Economy Minister Hiroko Ota told reporters, referring to U.S. mortgage loans made to people with flawed credit histories. Increasing numbers of subprime loans are going into default, threatening the U.S. and international banks that hold them and raising the cost of borrowing money.

European stock markets tumbled sharply. London's FTSE 100 index lost 3.7 percent, its largest drop in four years; France's CAC 40 fell 3.1 percent; and Germany's DAX dropped 1.5 percent.

"I think the turbulence in the markets will remain because there's concern of the unknown," said Amit Kara, a European financial analyst with UBS in London. "Institutions are holding on to contaminated subprime debt, and we don't know how widespread that is. So until that story unwinds, the jitters will remain.

"Risk is being held by a vast range of institutions. Some see this as a positive because risk is being spread across many institutions. The downside, however, is no one knows who's holding what amount."

The Bank of England, however, made no move to inject money into the British financial system; Britain is not one of the 13 countries that use the euro as their currency. "The silence is almost deafening," said Jonathan Loynes, chief European economist at Capital Economics, a research firm. But on the other hand, he said, "I don't think we have a major institution saying that it was affected."

The European Central Bank's two-day, $214 billion injection was "quite unusual," he said.

"Why the ECB felt the need to respond so dramatically is unclear; it has received a mixed response here," Loynes said. "Some say the ECB should be applauded. They took initiative; they responded decisively. Others say it was an overreaction, that it may itself prompt concern by causing people to wonder: What does ECB know that we don't know?"

The European stock slide followed a 2.8 percent drop in the Dow Jones industrial average on Thursday and a 2.4 percent fall in Japan's Nikkei index at the close of trading early Friday. Also early Friday, Hong Kong's Hang Seng index slumped 2.9 percent, Singapore's Straits Times Index fell 1.6 percent and Taiwan's Taiex declined 2.7 percent. Standard & Poor's Australian Stock Exchange 200 index fell 3.7 percent.

Russian stocks also fell Friday as investors cut their assets in riskier emerging markets. Shares of Sberbank, Russia's biggest bank, lost almost 4 percent of their value, and the dollar-denominated RTS index dropped 2.2 percent.

In Europe, banks and other financial companies took some of the worst beatings Friday, reflecting fears that they are overexposed to bad loans in the U.S. subprime mortgage market. In London, shares in Barclays, a major bank, dropped 6.5 percent; Standard Chartered, another bank, shed 5.4 percent and Schroders, an international asset management group, fell 6.4 percent. Shares in Man Group, a financial services company, dropped 9.1 percent.

The European sell-off began Thursday with an announcement by BNP Paribas, France's largest bank, that it was halting withdrawals from three hedge funds with a total value of about $2.2 billion that had exposure to U.S. subprime loans. The bank's shares were down 4.4 percent Friday.

Despite fears of increasing defaults from bad debt and continuing pressure toward a credit crunch, many analysts and government leaders said the long-term fallout from this week's market swings could be minimal. "It's hard to tell how the subprime issue will affect the Japanese economy right now," Ota, the economy minister, told reporters. "Its impact on the country's real economy is limited."

"My hunch is the fundamentals remain strong, inflation is coming down, global growth outside the U.S. is firm, the euro-zone investment demand is holding up well and the outlook for consumer spending is positive, particularly in Germany, where it's been anemic for a couple of years," said Kara, the UBS analyst. "Asia is also looking good. Corporate balances remain healthy, so the fundamental story is pretty good."

Alfa Bank in Moscow was much more cautious, sending a note to clients Friday morning warning that "the situation is simply far too unpredictable for analysis and is likely to remain so for several weeks at least."

"The very real danger is of a death spiral as investors rush to take money from funds that then results in even tighter liquidity conditions and further forced selling," the bank's note said. "While domestic fundamentals are very strong, if international markets remain volatile, then even the positive domestic story will not save prices."

Special correspondents Karla Adam in London and Anton Troianovski in Moscow contributed to this report.

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