The European Central Bank said today that it had noted increased tension in euro zone money markets as the end of the first quarter approached, and said it was ready to release more cash if necessary.
The ECB said it was tracking the situation, and that 'notwithstanding the ample liquidity conditions,' it 'stands ready to provide additional liquidity if needed.'
Money markets, on which banks lend to each other, see increased tension when financial institutions want to support their cash positions, in this case at the end of a fiscal quarter, and cut back on extending credit among themselves.
The benchmark three-month Euribor rate stood at 4.72% yesterday, while the one month level was 4.38%, both significantly above the ECB's main refinancing rate of 4%.
ECB president Jean-Claude Trichet told European Union lawmakers in Brussels yesterday that the bank would give the short-term money market all the support it needed.
Financial markets have witnessed repeated turbulence since the US market for high-risk, or sub-prime, mortgages collapsed in August, sending shockwaves around the world.
Since then, banks have become wary of lending to each other because they are not sure how exposed partners might be to significant financial losses and have also periodically preferred to hoard cash to ensure their own positions were well-secured.
The ECB, along with the US Federal Reserve, the Bank of England, the Bank of Canada and the Swiss National Bank have launched several coordinated operations to ensure markets that ample liquidity was available, and to encourage banks to continue extending credit on which business depends.
