With at least three European financial groups in trouble this morning, the Reserve Bank significantly boosted the amount of cash in money markets, after banks and other groups kept a record amount in their accounts with the central bank over the weekend.

The RBA added $2.72 billion in repurchase agreements this morning, even though the banking system was estimated to have a rare surplus of $424 million, so more than $3 billion was effectively in the money markets this morning to supply liquidity and keep a lid on short term rates.

That was after the banks and other institutions left a record $7.56 billion in their exchange settlement accounts on Friday to cover what was a nervy weekend with the US bailout in doubt and several other financial groups in the gun.

Even though the $US700 billion bailout is moving towards approval within the next couple of days, new troubles at Fortis, a European financial giant based in Belgium, Bradford and Bingley, UK mortgage bank and at a German mortgage bank called Hypo real Estate was on the brink of failure, according to the Financial Times.

Hypo Real Estate has three fixed interest type securities listed on the ASX: one is a floating rate note (and FRN) and the other two carry a coupon of 5.75% and 6.25% respectively.

Short term bank bill rates (30 day) are still above those for 90 and 180 day bills, a sign of the intense upward pressure on short term lending rates as banks withhold cash from each other and watch and wait for the next domino to fall.

The Reserve Bank meets a week tomorrow to consider interest rates and dealers reckon it will cut rates by at least 0.25% to send a signal to the market that it wants lower levels. A cut of 0.50% might happen to make sure that the banks have to cut by at least half that to accommodate the recent rise in short term funding costs.

Peter Fray

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