LONDON (Reuters):

World stocks tumbled yesterday after BNP Paribas became the latest bank to be hit by mortgage credit problems and shortage of cash in money markets prompted the European Central Bank to add emergency liquidity.

The French bank froze more than US$2 billion worth of funds as problems in risky United States subprime mortgages and diminishing liquidity prevented it from calculating their value.

The news sent shivers through markets already nervous that troubles in U.S. mortgages would spread globally, hitting banks and the broader financial system. Investors rushed to buy safe-haven bonds and the low-yielding yen to preserve capital.

Six-year peaks

Overnight euro and dollar deposit rates hit six-year peaks at one point with concerns growing there could be more subprime-related problems from financial institutions. Rates fell after the ECB injected liquidity in the market.

"There appears to be a dash for cash both in dollars and in euros," said Nick Parsons, head of market strategy at nabCapital.

"Because liquidity in the market is drying up and because financing is also becoming more difficult, it seems that investors who need to finance their holdings of securities are not being able to draw on credit facilities and instead having to finance in the cash market. That's putting up rates on cash."

Big one-day rise

Euro deposit rates for overnight and tomorrow/next day deliveries hit their highest in October 2001. U.S. dollar deposit rates for tomorrow/next day delivery posted their biggest one-day rise in eight years.

Short-end dollar interbank market rates rose with overnight jumping to the highest level since January 2001.

"No one really knows how big the current credit problems are and whodoes or does not have significant risk exposure. This is undermining confidence in the system as a whole," said Charles Diebel, head of European rates strategy at Nomura International.

"The problem here is that if funding costs spike, it will create a lot of issues for leveraged accounts and may force loss crystallisation."

The MSCI main world equity index fell 0.8 per cent, while the FTSEurofirst 300 index was down more than two per cent after hitting a two-week high on Wednesday. U.S. stock futures pointed to a sharply weaker open on Wall Street.

The iTraxx Crossover index, a widely-watched indicator for European credit market sentiment, widened to 340 basis points. Emerging market sovereign bond spreads also widened.

The September Bund future was up 44 ticks. The yen was up one per cent against the dollar and euro as investors trimmed yen-funded carry trade positions. The dollar rose against the euro, helped by higher short-dated dollar deposit rates.

U.S. interest rate futures show investors pricing in a 60 per cent chance of a September Federal Reserve interest rate cut, compared with 20 per cent on Wednesday.

VOLATILITY AHEAD

In the past few weeks the global financial market has been jolted by the repricing of risks and volatility in credit markets. This could hit corporate earnings and merger activity, force consumers to cut back spending and damage the otherwise robust global economy.

Dutch merchant bank NIBC disclosed 137 million euros of losses on U.S. asset-backed securities in the first half and said it has shelved plans for an initial public offering.

The Bundesbank said participants in the rescue package for German lender IKB - Europe's highest-profile casualty of subprime problems - agreed to set up a banking pool, led by state-owned KfW.

The latest swings come as investors have been torn between the subprime jitters and upbeat corporate earnings results.The DAX volatility index rose 11.3 per cent, off Wednesday's two-week low. Calyon's composite implied FX volatility measure is close to one-year highs at 9.24 per cent.

Concerns about subprimes and the impact on the global economy hit oil prices. London Brent crude oil was down 1.6 per cent while gold was down two per cent.

TAKEN FROM THE FINANCIAL GLEANER, FRIDAY, AUGUST 10, 2007