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European banks to get unlimited dollar liquidity

European central banks said they would lend out as much US dollar liquidity as commercial banks need in a further joint bid to tame money market tensions.

In a joint announcement with the US Federal Reserve, the European Central Bank, the Bank of England and the Swiss National Bank said they would meet all bids from commercial banks at a fixed interest rate.

“Counterparties in these operations will be able to borrow any amount they wish against the appropriate collateral in each jurisdiction,” the Fed said in a statement.

“Central banks will continue to work together and are prepared to take whatever measures are necessary to provide sufficient liquidity in short-term funding markets.”

The move follows top-level meetings over the weekend in Washington and Paris, where policymakers vowed to staunch the credit rout which is threatening to tip the global economy into recession.

After several high-profile bank collapses, fear of further failures is paralyzing the normal bank-to-bank lending which is vital for keeping cash in circulation, and doubts remain about whether the raft of measures already announced - including historic coordinated interest rate cuts - will help.

The latest joint liquidity effort will involve the ECB, BoE and SNB holding regular 7-day dollar auctions, in addition to existing 28-day and 84-day dollar liquidity operations.

The Bank of Japan said it would consider similar measures and the Fed will increase its currency swap lines with the ECB, SNB and BOE by an unspecified amount to fund the operation.

US markets are closed on Monday but traders in Singapore said there were few transactions in dollar deposits. Those that did occur were for tom-next funds, where banks borrow for a day from Tuesday to Wednesday.

“Most people are on the sidelines. Tom-next range is between 4% and 6% but most trades are between 4%-4.5%,” said a trader in Singapore.

The European initiatives are complemented by efforts underway in countries including India, Indonesia and Australia to free up liquidity flows in their economies as well.

Just a day after the Australian government decided to guarantee the country's entire 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% on Saturday, releasing about $12 billion into the banking system. (Reuters)