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Central banks pour in cash as lending crunch lingers

September 28, 2007|From Reuters

Hopes that global credit markets might be coming unstuck were derailed Thursday after an escalation of key European bank lending rates and data on U.S. commercial paper suggested the lending drought was persisting.

The sense of lingering trouble was reinforced by actions from central banks in the U.S. and Europe, which were forced to inject large quantities of cash into the banking system to keep the wheels of global capital turning.

In the private lending arena, meanwhile, Kohlberg Kravis Roberts & Co.'s banks sold $9.4 billion of loans used for the buyout of First Data Corp. in the biggest offering of high-yield loans since corporate funding dried up in July, people with knowledge of the deal said.

But investors who bought the loans demanded a discount on the price, traders said.

Still to be sold to complete the First Data deal: about $9 billion in junk bonds.

Some companies continue to find it hard to raise money, according to the Federal Reserve's tally of outstanding commercial paper.

The amount of those short-term securities outstanding fell $13.6 billion over the last week, marking nearly two months of continuous declines that reflect the ongoing anxiety.

Companies use commercial paper to fund day-to-day operations. Analysts say the longer this retrenchment lasts, the more it could drag down the broader economy.

"The commercial paper market is not deteriorating as fast as it was in August, but as long as 'outstandings' continue to fall, it is not out of the woods yet," said Chris Low, chief economist at FTN Financial.

In an effort to encourage lending, the Federal Reserve added $38 billion to the banking system Thursday, matching the largest such sum since the start of the credit crunch.

The European Central Bank also stepped in, lending $5.5 billion to banks Wednesday at its hefty 5% rate reserved for emergencies -- the largest amount borrowed in this manner in nearly three years.

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