Central banks dole out cash as bailout doubts grow

Central banks across the world scrambled on Friday to meet a desperate demand for cash, both in their own currencies and the U.S. dollar, as the White House's $700 billion bailout plan ran into roadblocks. News of the biggest ever U.S. bank failure only added to the thirst for liquidity, with the government brokering a last-ditch purchase of thrift Washington Mutual by JPMorgan.

"The market is just frozen at the moment," said Claudio Piron, a strategist at JPMorgan Chase Bank in Singapore.

"We are at such a point of absent liquidity that prices are beginning to fail in their usefulness as a signal - this in itself is disturbing."

Overnight dollar funds remained in a broad 2.5-3.5 percent range in Asia, bankers in Singapore said. Short-term lending rates in local currencies jumped with Singapore dollar overnight rates at 2 percent, their highest since end-January.

Unease intensified after House Republicans balked at Treasury Secretary Henry Paulson's plan to buy bad debt from banks and instead floated an idea of their own for mortgage insurance, casting the whole bailout into doubt.

With commercial banks everywhere hoarding cash and reluctant to lend to each other, central banks were increasingly stepping in to fill the void.

The extremely tight money market conditions were exacerbated by banks hoarding short-term cash before closing their books on the third quarter next week.

Also making matters worse, three-month funding needs were rolling over into the year-end closing, which was also next week.

The Swiss National Bank offered $9 billion of U.S. dollar for one week, saying central banks were taking the array of initiatives to address the severe quarter-end stresses.

The European Central Bank soon followed suit, offering $35 billion of U.S. dollars for one week. The Bank of England said it would lend $30 billion.

On Thursday, three-month U.S. dollar LIBOR shot up nearly 30 basis points to 3.769 percent -- its highest levels since January and nearly 2 percentage points above the expected federal funds rate in three months time.

That is double the levels seen in previous money market crunches since the credit crisis struck in August last year.

The Reserve Bank of Australia (RBA) launched its first ever repurchase operation in U.S. dollars and all $10 billion on offer was hungrily snapped up at 3.165 percent, well above the minimum bid rate of 2.35 percent.

The RBA established a U.S. dollar swap line with the Federal Reserve earlier in the week, aimed at meeting strong demand for U.S. dollars during Asian trading hours.

In South Korea, the Finance Ministry said it would inject $10 billion or more into the local swap market until the middle of October to stave off persistent dollar funding shortages.

South Korea's central bank said it would skip its weekly bond auction next Monday, a move widely seen as aimed at keeping the local money markets flush with liquidity.

Traders in the local money market say there were around 4 trillion won ($3.5 billion) worth of monetary stabilisation bonds due to mature next week.

The RBA and the Bank of Japan also kept adding extra cash to their own banking systems on Friday, while Vietnam lifted the rate it pays on bank reserves to reduce the cost of borrowing.

Yet these sums paled into insignificance compared to the U.S. Federal Reserve's largesse.

Figures released late Thursday showed U.S. institutions borrowed from the Fed $188 billion per day on average in the latest week, almost four times the previous record.

"The scale of the Fed's direct support for the financial system escalated dramatically this week," said Lou Crandall, chief economist at Wrightson ICAP, in a note to clients.