EU pours in dollars to ease market tensions

The European Central bank will tender as much as $US 20 billion to European banks to ease money market tensions. It measure came just one day after the US Federal reserve disappointed investors with a quarter percentage point rate cut, sending stocks plun

The U.S. Federal reserve together with four other central banks made a massive rescue effort to inject fresh money into the worldwide banking system.

They will launch a temporally auction facility that banks can use to secure short-terms loans.

Natalya Orlova, Chief Economist at Alfa-Bank in Moscow says that “the recent package just aims at increasing number of banks which have the access to the re-financing of the Central banks across the globe. This will provide liquidity to the global economy.”

Although Central banks will support liquidity on the market many say they do not solve the main problem.

According to David Wyss, economist at Standard & Poor's in New York, “banks are scared of lending to other banks, of lending to other people. As a result they are demanding higher premium, higher difference above the cost of lending to the government or to the Fed in order to lend that money out. That means that the Fed's efforts to bring interest rates down have essentially been offset by the market's increased wary and market's increased desire to get more yield for taking on what it now sees as more risk then it used to.”

Meanwhile Russian banks seem to have no troubles borrowing money thanks to the timely reaction of the Central Bank – analysts say.

“Larger lombard list, introducing currency swaps, using repo operations to larger extent – these are the measures the Russian Central bank has already implemented. Currently on the inter-bank market we have rates below 4% and generally situation is quite stable,” Orlova underscores.

However Russian banks are still facing the problem of future growth. With local funding historically insufficient, to continue development banks have to borrow internationally.

More expensive foreign money may slow down banks’ growth resulting in additional pressure on local interest rates.