Central banks give biggest liquidity boost ever

The European Central Bank alone lent over half a trillion dollars (€349bn) to lenders for two weeks in an unlimited auction. The rate was set at just 4.21pc, far below the market cost of short-term money.

Marc Ostwald, an economist at Insinger de Beaufort said: "It is a serious signal that the ECB means to break the logjam and get banks to lend again. We have reached a point of almost complete seizure in the credit markets."

The sheer scale of lending suggests that last week's shock move by five top central banks to calm the markets was not enough to restore confidence. Spreads on the key money rates of Euribor and Libor remained at extremely elevated levels.

"The ECB's unlimited liquidity is a sign of emergency: people who think this move is just end of year house-keeping have lost touch with reality," said Hans Redeker, currency chief at BNP Paribas.

"The ECB has had to take dramatic action because the co-ordination last week did not have much effect. The bank underestimated the damage already done in the financial market," he said.

In Britain, lenders showed up tentatively to the Bank of England's £10bn auction of three-month funds, reassured that the "Northern Rock-style" stigma of emergency borrowing has been removed. Bids reached a total of £10.85bn, starting at a rate of 5.36pc - below the Bank's Base Rate of 5.5pc.

One bid reached as high as 6.6pc, a sign that at least one lender is struggling to raise money on the capital markets and may be in difficulty. Sterling Libor is currently 22 basis points lower at 6.38pc.

"Clearly this is somebody who didn't have access to Libor at market rates," said John Wraith, head of UK rates strategy at the Royal Bank of Scotland.

Observers said the modest volume of bids at the Bank auction suggests the levels of stress in the UK financial system are less than feared. But it could mean that UK lenders are flocking instead to the ECB's window in Frankfurt, where money is far cheaper.

The latest actions appear to have calmed one-month money markets in Europe, but spreads on three-month lending have proved sticky. Euribor is still trading at 4.82pc, a huge premium to the ECB's policy rate of 4pc.

The US Federal Reserve will today release the results of its term auction lending, which allows banks across the US to borrow on easier conditions and provide mortgage securities as collateral. The Fed is lending $40bn over two weeks.