The European Central Bank and the Swiss National Bank will offer banks long-term loans in dollars in an extension of coordinated efforts with the U.S. Federal Reserve to ease money market tensions.
The ECB and the SNB announced on Wednesday they would start lending dollar funds for 84 days in tandem with the Fed, in addition to the 28-day dollar lending in place since last December.
The central banks will alternate auctions of 84-day funds -- for a maximum of $2 bln from the SNB and $10 bln for the ECB -- with 28-day funds on a bi-weekly basis.
The announcement follows record demand for dollar liquidity at the ECB's last 28-day auction, when banks bid for more than four times the $25 billion on offer.
Economists and traders said the move, which pushed down euro zone government bond and Euribor interest rate futures, showed the seriousness of money market tensions a year after the initial shock to credit markets.
"The extra liquidity is helpful but there is more need for funding over longer-term horizons," Commerzbank economist Michael Schubert said.
"It's not a surprise given the last (ECB) dollar auction was oversubscribed and it's a sign that financial tensions are ongoing." Although demand at the SNB's bi-weekly dollar auctions has eased, this week's offering attracted bids worth almost double the $6 billion on offer.
"The action shows that the crisis is far from over. Obviously the central banks came to the same conclusion," a Zurich-based money market trader said.
"Some banks might still find it hard to provide the collateral to participate. We will see whether it helps. LIBOR rates might ease somewhat," they added.
Benchmark London-based rates for borrowing three-month dollar and euro funds rose on Wednesday and the benchmark EURIBOR rate for three-month unsecured euro lending between European banks hit 4.963 percent, close to the 7-1/2 year peak of 4.967 percent seen last month.
In addition to the extra dollar funding, the ECB is also providing extra funds in euros over three- and six-month horizons to combat high long-term market interest rates.