In response to the subprime meltdown spreading across the Atlantic, the European Central Bank loaned 94.8 billion euros ($130.2 billion) in emergency funds to European banks this morning — an unprecedented amount and the first time it’s taken such action since the 9-11 terrorist attacks, according to press reports.
The Wall Street Journal online reports: “Concern that European banks face growing losses on investments linked to U.S. mortgages shot the euro zone’s overnight borrowing rates to 4.7% today, their highest since October 2002 and well above the ECB’s benchmark financing rate of 4%.”
The Journal goes on:
In a statement today, the ECB said it was providing the emergency funds “to assure orderly conditions in the euro money market.” It’s the first time the bank has guaranteed its loans at a fixed rate since Sept. 12, 2001, when the bank lent the market €69.3 billion.
In a sign the bank achieved its goal, overnight rates moved back to 4% in the wake of the ECB’s move. “In my view, this is outstanding central banking by the ECB and ought to provide a lot of comfort to the market,” said Goldman Sachs senior European economist Erik Nielsen.
And Reuters reports that France’s biggest bank, BNP Paribas, halted withdrawals on 1.6 billion euros ($2.2 billion) in three investment funds, citing the U.S. subprime meltdown and a drop in trading of securities backed by mortgages.
Here’s more from Reuters:
The frozen funds amount to less than 0.5 percent of funds under management for the eurozone’s second biggest bank by value, but later in the day a separate European fund valued at 750 million euros was frozen too, and a Dutch bank pulled its planned new listing after suffering subprime losses.
This latest subprime fallout came as Germany’s Bundesbank held a meeting of those involved in the rescue of Europe’s highest profile subprime victim yet, lender IKB, and as the European Central Bank said it stood ready to act if needed to ensure smooth functioning of markets.
BNP Paribas said it was barring investors from redeeming cash from the funds.
“The complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly, regardless of their quality or credit rating,” it said in a statement.
“… BNP Paribas Investment Partners has decided to temporarily suspend the calculation of the net asset value as well as subscriptions/redemptions, in strict compliance with regulations, for these funds,” it added.
BNP Paribas said the three funds had declined rapidly in size in the past few weeks to 1.593 billion euros ($2.19 billion) at August 7, down from 2.075 billion at July 27. The bank has 326 billion euros of assets under management.
Most of the decline was due to investors pulling out of the funds, said Alain Papiasse, head of asset management and services at BNP Paribas.
“There are competitors who have announced they are closing funds but we are not at all in that same pattern,” he said, adding the funds mainly held investment grade assets.
I wonder, however, how much “subprime” is being blamed for the mortgage crisis these days, which appears to have spread to borrowers higher up the credit ladder. After all, as I just quoted from Reuters, the assets held by the funds in France were mostly “investment grade.”
From what I’m hearing from analysts and lenders, sales of loans to Wall Street investors have dried up. The only buyers still buying as usual are government-sponsored Freddie Mac and Fannie Mae.
And one more tidbit from the WSJ: “Further stoking market fears, the Web site of the German newspaper the Frankfurter Allgemeine Zeitung said this morning that German state lender West LB could have major exposure to the U.S. subprime market. West LB said its exposure was limited.”
…and so it starts