Money Markets Ease on Unlimited Dollars Pledge

Money market rates slipped Monday after central banks unveiled new steps to rescue a wounded global financial system in a bid to boost investor confidence and to prevent a worldwide recession.

The interbank cost of borrowing in US dollars, sterling and euros all fell. Three-month euro Libor posted its biggest decline this year, three-month dollar Libor had its steepest fall since March, and Euribor rates eased across the board.

In a move to unlock jammed money markets, the European Central Bank said it would lend banks as much U.S. dollar funds as they need. Furthermore, the ECB along with the U.S. Federal Reserve, the Bank of England and the Swiss National Bank scrapped their existing U.S. dollar auction systems and replaced them with a new fixed rate system.

In addition, governments in the UK, France and Germany all announced plans to recapitalize their banking systems.

Moreover, the U.S. government is soon expected to announce plan to invest in banks and broaden guarantees on deposits after some European countries already made such moves. The U.S. plan could be unveiled as early as Wednesday.

These moves follow top-level meetings over the weekend in Washington and Paris, where policymakers vowed to bring an end to the credit rout which is threatening to tip the global economy into recession.

Hopes that these far-reaching measures can soon unleash funds to cash-strapped banks and borrowers sparked a recovery in global stock markets which suffered one of their worst weeks ever last week.

While the latest round of government actions is deemed necessary, it is unclear whether it is adequate to finally contain the current financial crisis, analysts said.

Inter-bank lending rates will "likely fall in response to the forceful global response," said Tony Crescenzi, chief bond market strategist at Miller, Tabak & Co. in New York. The rate in these closely-watched rates may be "not enough to reduce anxieties significantly."

Record Deposit

In euro lending markets, Euribor rates dropped as the impact of changes by the European Central Bank to its lending rules and benchmark rate continued to pay dividends.

Banks also deposited a record 155 billion euros into the ECB's overnight account, topping the previous record by 50 percent as they got to grips with more attractive rates set last week.

The borrowing costs on three-month dollar fund in the London interbank market eased to 4.75250 percent from Friday's 10-month high, but they remained well above the Fed's short-term target rate of 1.50000 percent.

U.S. money markets were closed Monday for the Columbus day holiday.

The latest European and U.S. initiatives were complemented by efforts underway in countries including India, Indonesia and Australia to free up money flows in their economies.

Just a day after the Australian government decided to guarantee all the country's deposit base and back refinancing requirements of Australian banks, the central bank injected A$2.849 billion ($1.9 billion) in its regular daily operation.

That was above an estimated need of A$1.05 billion, effectively adding around A$1.8 billion and keeping the banks' cash cushion with the central bank around historic highs.

India cut the cash reserve ratio for banks by 150 basis points to 7.5 percent Saturday, releasing about $12 billion into the banking system. Overnight call rates eased about 5 percentage points from Friday to about 10 percent.

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