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FRANKFURT - Central banks pumped billions into money markets for a second day Tuesday as worries grew that US insurance giant AIG might follow investment bank Lehman Brothers into bankruptcy and spark a global meltdown.
A day after Lehman collapsed and Merrill Lynch, another Wall Street titan once considered invincible, was sold, central banks in Europe and Japan provided a desperately needed 160 billion US dollars in liquidity.
In the United States, the Federal Reserve injected 50 billion US dollars, adding to Monday's 70 billion US dollars and taking the total amount injected by central banks since the weekend to more than 300 billion US dollars.
The Fed "stands ready to arrange further operations later in the day, as needed," a statement said.
Attention turned to whether AIG, one of the world's biggest insurers with 74 million customers worldwide, most of them American, would be able to secure sufficient credit to prevent its collapse.
Its shares plummeted 70 per cent at the open on Wall Street after 60 per cent of its market value was wiped out in Monday trade on fears it may only survive until Wednesday unless it gets fresh funding. Its collapse could potentially be even more damaging than that of Lehman Brothers.
AIG was at risk of following Lehman Brothers into bankruptcy despite approval for it to borrow 20 billion US dollars and as reports said the Federal Reserve had asked two banks to help provide 70-75 billion US dollars.
Share prices fell for a second day, with the Dow Jones Industrial Average down 0.54 per cent in early trade, London's FTSE 100 off over four per cent and Frankfurt's DAX more than three per cent lower.
The collapse of Lehman, the fire-sale of Merrill Lynch and worries about AIG have contributed to concerns that money markets, where banks secure short term financing, might dry up.
To counter this the European Central Bank said it allotted 70 billion euros (100 billion US dollars), more than double the 30-billion-euro injection it had provided on Monday.
It also said it had lent 150 billion euros to commercial banks in a regular weekly refinancing operation in which markedly higher lending rates reflected increased market tensions.
The Bank of Japan meanwhile carried out two injections, the first of 1.5 trillion yen (14 billion US dollars, 10 billion euros) and the second of 1.0 trillion yen.
In Britain, the Bank of England injected 20 billion pounds (35.9 billion US dollars), four times Monday's total.
Switzerland's central bank said it would supply liquidity "in a flexible manner and generously" to money markets. On Monday the Swiss National Bank injected twice as much liquidity as usual to the market.
After the Fed's latest 50-billion-US-dollar injection, all eyes were on whether the US central bank might reverse its policy and cut interest rates to prevent the US financial system from toppling and dragging the economy down with it.
Economist Brian Bethune at Global Insight said: "The sudden bankruptcy of Lehman Brothers ... has led to another dangerous escalation of the crisis in the US financial markets -- a crisis that has been seriously harming the performance of the economy for over a year now.
"The economy is very weak, the recession wolves are pounding down the door and the financial system faces new deflationary threats from the bankruptcy of Lehman Brothers. This is an emergency situation."
Dominique Strauss-Kahn, the head of the International Monetary Fund, said on Tuesday the current international credit crisis was "unprecedented" but cautioned against panic.
- AFP/ir
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