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Monday, August 13, 2007

ECB's Dangerous Game

The European Central Bank (ECB) is currently playing a very dangerous game, as it tries to avert a major credit crisis.

The ECB said that it will offer cash to euro-region money markets for a third trading day, as it tries to avert a credit crunch. This bail out is in response to the credit crisis precipitated by the sub prime mortgage collapse in the US.

The ECB, the U.S. Federal Reserve and other central banks injected $154BN into money markets on August 9 and $135BN on August 10, amid concerns that the U.S. subprime mortgage losses would curtail lending.

The danger here is that markets may interpret these injections as the harbinger of bad news, that has yet to be made public; the markets can smell fear, and are very unforgiving.

The ECB is playing a very dangerous game, which may precipitate something that it is trying to avoid..

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