Bank lending seizes up worldwide
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LONDON: The cost of borrowing in dollars surged the most on record Tuesday after the U.S. Congress rejected a $700 billion bank rescue plan, heightening concern more institutions will fail.
The London interbank offered rate, or Libor, that banks charge each other for such loans climbed 431 basis points to an all-time high of 6.88 percent Tuesday, the British Bankers' Association said. The euro interbank offered rate, or Euribor, for one-month loans climbed to record 5.05 percent, the European Banking Federation said. The Libor-OIS spread, a gauge of the scarcity of cash, advanced to a record. Rates in Asia also rose.
"The money markets have completely broken down, with no trading taking place at all," said Christoph Rieger, a fixed- income strategist at Dresdner Kleinwort in Frankfurt. "There is no market any more. Central banks are the only providers of cash to the market, no-one else is lending."
Credit markets have seized up, tipping banks toward insolvency and forcing U.S. and European governments to rescue five banks in the past two days, including Dexia, the world's biggest lender to local governments, and Wachovia. Money-market rates climbed even after the Federal Reserve Monday more than doubled the size of its dollar-swap line with foreign central banks to $620 billion. Banks borrowed dollars from the ECB at almost six times the Fed's benchmark interest rate Tuesday.
The two-month Libor rose to 5.13 percent Tuesday, also a record. Libor, set by 16 banks including Citigroup and UBS in a daily survey by the BBA, is used to calculate rates on $360 trillion of financial products worldwide, from home loans to credit derivatives.
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Funding constraints are being exacerbated as companies try to settle trades and buttress balance sheets over the quarter-end, balking at lending for more than a day.
"Counterparty fear in the banking sector is at a new extreme," said Greg Gibbs, director of currency strategy at ABN Amro Holding Bank in Sydney. "Credit conditions are as tight as a drum. Unless this settles down, central banks would need to cut rates globally to bring funding costs down."
The ECB said it lent banks $30 billion for one day at a marginal rate of 11 percent. The Fed's key rate is 2 percent. The ECB said it received bids for $77.3 billion. The Bank of Japan injected more than ¥19 trillion, or $182 billion, into the country's system over the past two weeks, the most in at least six years. The Reserve Bank of Australia pumped in A$1.95 billion, or $1.6 billion, Tuesday.
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