London, UK (FT.com): The European Central Bank on Thursday voiced its “high concern” at growing evidence that banks are exploiting its efforts to unblock the frozen funding markets by using its liquidity scheme to offload more risky assets than it envisaged.

Yves Mersch, a governing council member, said the ECB was now “looking very hard at whether there is not a specific deterioration of collateral” which the central bank is accepting in return for funds.

He was speaking amid signs of some banks creating low-rated assets specifically so they can be traded for treasuries at the European Central Bank.

Central banks have become important in providing funding for difficult to sell mortgages on what is intended to be a short-term basis while securitisation markets remain frozen.

The Bank of England recently created a facility for UK banks to access funding for mortgages and the Financial Times has learnt that almost £90bn ($175bn) worth of bonds are being created to be placed there - almost twice the £50bn in­itially expected when the scheme was launched only three weeks ago.

But the ECB, which is proud of having always had in place the same system to support bank liquidity, accepts a far broader range of collateral than other central banks. It now appears to have some worries about what is being used by banks.

On Thursday, however, speaking at the International Capital Market Association in Vienna, Mr Mersch said the type of collateral now being accepted was: “A matter of high concern.”

His comments come as banks, whose main centres of operations are not within the eurozone, are structuring new bonds based on assets other than mortgages in order to gain access to ECB funding.

The ECB’s main mortgage-bond exposures so far are believed to be from Spanish, Dutch and some UK deals, but the central bank publishes few details on the collateral it holds.

However, this week Glitnir, the Icelandic bank, is in the process of clearing the use of a €890m ($1.37bn) collateralised loan obligation (CLO) for funding at the ECB. Similarly, Lehman Brothers recently structured a €1.1bn CLO, which it is expected to use for ECB funding.

Meanwhile, Macquarie Leasing, a unit of the Australian bank, has done a securitisation of Australian motor loans, which will have a euro-denominated slice so that the investors who buy the deal can use it at the ECB.

Investment bankers who work in securitisation say that their main business is structuring bonds that are eligible for ECB liquidity operations. Some analysts have concerns about whether the bonds being created will ever be saleable if markets recover.

“There is moral hazard . . . and we are not in the business of taking over the market,” Mr Mersch said. “That means there must be an exit strategy.”

The importance of central bank involvement in supporting securitisation markets has been shown again in the UK, where the Bank of England’s Special Liquidity Scheme has already attracted almost twice the level of demand originally anticipated.

According to debt market sources, the banks planning to use the scheme are the UK’s eight largest lenders.

Copyright The Financial Times Limited 2008

Copyright The Financial Times Limited 2008

New York, NY (Bloomberg.com): Credit Suisse Group recommended buying shares of Al Rajhi Bank, Saudi Arabia’s biggest bank by market value, as well as Saudi Arabian Fertilizer Co. and said the country is in a “golden era.”

The brokerage also initiated coverage on Riyad Bank and Almarai Co. with “outperform” ratings. Saudi Basic Industries Corp., the world’s biggest chemicals maker by market value, received a “neutral” recommendation.

“Oil prices are at an all-time high; hundreds of billions of dollars of infrastructure investments are expected to drive growth,” analysts including Mohamad Hawa wrote in a note. “The government is continuing to diversify its hydrocarbon-based economy.”

The economy of Saudi Arabia, the world’s biggest oil supplier, will grow 4.9 percent in 2008, according to the median estimate of seven economists surveyed by Bloomberg in December. Oil has climbed about 80 percent in the past year. Crude oil for June delivery rose as much as $1.77, or 1.6 percent, to $115.23 a barrel in after-hours electronic trading on the New York Mercantile Exchange. Half of Saudi Arabia’s gross domestic product comes from the oil and gas industry.

The kingdom is seeking to build five cities as part of a plan to attract foreign investment and create more than 2 million jobs. King Abdullah Economic City, for example, will be built over 65 square miles of land on Saudi Arabia’s Red Sea coast at a cost of $26.6 billion.

Price Estimates

Credit Suisse now covers 13 Saudi companies, among them seven banks. The brokerage gave four “outperform,” five “neutral” and two “underperform” recommendations. It maintained a “neutral” rating for the two telecom companies that it started covering earlier this year.

Al-Rajhi Bank was rated “outperform” with a price estimate of 112.87 riyals, as was Saudi Arabian Fertilizer, also known as Safco. The price projection for the maker of fertilizers was set at 242 riyals. The shares closed at 96 and 223 yesterday respectively.

Riyad Bank, the kingdom’s fourth-biggest bank, got a price estimate of 99.92 riyals and Almarai, the country’s second- biggest foods company, of 163.58 riyals.

Credit Suisse set a price estimate for Saudi Basic of 174.76 riyals. The shares closed at 149.5 riyals.

Saudi Arabia’s Tadawul All Share Index has declined 8.8 percent this year, while five of the seven Persian Gulf benchmarks advanced. Oman’s index is the region’s best performer so far, having soared 25 percent. In Saudi Arabia, only nationals of GCC states or residents of the kingdom can freely trade the country’s stocks.

Credit Suisse maintained “neutral” recommendations on Saudi Telecom Co., the largest Arab phone company, as well as on Etihad Etisalat Co. and reduced their price estimates.

Saudi Arabia’s exchange is closed for the weekend today.

VIENNA, Austria (AP) — Oil prices slipped Wednesday, adding to their steep slide of more than $3 a barrel in the previous session on a strengthening U.S. dollar and data showing a dramatic drop in American fuel demand.

Easing concerns about supplies also put a lower ceiling on prices.

Trading was cautious in Asia as market participants awaited the U.S. Federal Reserve’s decision on interest rates later Wednesday.

Analysts believe a quarter percentage point rate cut is already factored into the oil market. A decision to hold rates steady could further strengthen the dollar, though, causing oil to continue its slide.

“The markets will now wait and see … what’s going to happen tonight, unless there’s more news on the supply side,” said David Moore, a commodity strategist with the Commonwealth Bank of Australia in Sydney.

Light, sweet crude for June delivery fell 67 cents to $114.96 a barrel on the New York Mercantile Exchange by midafternoon in Singapore. The contract fell $3.12 to settle at $115.63 a barrel Tuesday after the release of a monthly report from the U.S. Energy Department.

The data showed demand for finished petroleum products dropped 8.5 percent in February from January, and demand for gasoline fell 6.2 percent. Some of that drop can be attributed to February’s being a shorter month, but it still suggests high prices are cutting America’s appetite for fuel.

At the same time, supply concerns in some places are easing. A British refinery strike that caused the shutdown of a 700,000-barrel-a-day pipeline system ended Tuesday. Listing other bullish factors, Vienna’s JBC Energy noted “talks under way to end the six-day strike at an ExxonMobil site in Nigeria and production in the North Sea being ramped up after the recent short-term closures of the Forties Pipeline system.”

In the U.S., the Energy Department’s weekly inventory report on Wednesday was also expected to show domestic crude supplies rose, according to analysts surveyed by Platts, the energy research arm of McGraw-Hill Cos.

U.S. crude oil inventories were expected to have risen 1.6 million barrels last week, with crude imports continuing to grow as refiners ramp up production, the Platts survey said.

Analysts projected a decline of 800,000 barrels in gasoline stocks and a 150,000-barrel build in stocks of distillates, which include heating oil and diesel, the survey showed. Refinery utilization was expected to edge up 0.3 percentage points to 85.9 percent.

The oil market is also expected to keep an eye on other key information releases later this week such as the U.S. Labor Department’s payroll report, Moore said.

“Those things are going to be very important to the direction of the U.S. dollar and also perceptions of the strength of the U.S. economy, and therefore very important to the oil price,” he said.

Commodities such as oil are less effective hedges against inflation when the dollar is gaining ground, and a stronger greenback makes oil more expensive to investors overseas. Analysts believe oil’s run from $65 a year ago to a record near $120 on Monday has been fueled in large part by the dollar’s protracted decline.

In other Nymex trading, heating oil futures were nearly flat at $3.252 a gallon while gasoline prices fell more than a penny to $2.9253 a gallon. Natural gas futures fell by more than 2 cents to $10.8 per 1,000 cubic feet.

Brent crude futures slid 43 cents to $113 a barrel on the ICE Futures exchange in London.

WASHINGTON (AFP) — World economic leaders here this weekend took steps to alleviate the worst financial shock in decades and a food price crisis that is sparking deadly unrest in developing countries.

In three days of meetings that ended Sunday, finance ministers and central bankers grappled with the credit squeeze and inflation emergencies against the backdrop of an apparent US recession and a sharply slowing global economy.

The Group of Seven industrialized countries set the alarmed tone on the eve of the annual spring meetings of the 185-nation International Monetary Fund and its sister institution, the World Bank.

Confronted by what the IMF head says is the worst financial crisis since the 1930s Great Depression, finance chiefs from Britain, Canada, France, Germany, Italy, Japan and the United States decided only greater transparency in the financial system could restore normalcy to the markets.

The G7 endorsed recommendations from an international forum and set for some of them a deadline for implementation unprecedented in its brevity — 100 days.

Recommendation is a “gentle word,” said Bank of Italy governor Mario Draghi, who also chairs the Financial Stability Forum that made the proposals. “In fact some of these recommendations are actually policy decisions.”

The sudden nosedive in the global economy after several years of robust growth “even six months ago would have been unthinkable,” he added.

At the October meetings of the G7, the IMF and World Bank, the market turmoil that had erupted in August from rising defaults in the US high-risk subprime home loan sector was largely viewed as a contained event that did not threaten the broader world economy.

With the credit squeeze still spreading, the IMF recently warned that the US economy, the world’s biggest, was entering a recession and world growth was deteriorating so sharply a global recession was also in view.

The IMF estimated the crisis would cost the global financial system nearly one trillion dollars.

The IMF on Saturday wrapped up its meeting with a call for “strong action and close cooperation” to combat the financial crisis.

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