Money-Market Rates Climb to Records, BOE Relaxes Funding Rules

Bloomberg  / October 3, 2008 15:15 EDT

By Justin Carrigan and John Fraher

Oct. 3 (Bloomberg) — Money-market rates jumped to records, Treasury bill rates fell and the Bank of England relaxed borrowing rules for financial institutions as “extraordinary” strains deepened the credit freeze.

The London interbank offered rate, or Libor, that banks charge each other for three-month loans in euros increased to 5.33 percent, an all-time high, the British Bankers’ Association said. The corresponding rate for dollars climbed to 4.33 percent, the highest since January. The Libor-OIS spread, a gauge of cash scarcity among banks, widened to a record and Asian bank rates climbed to the highest levels in at least nine months.

“It feels like the financial-sector problems are snowballing, developing momentum that will be hard to stop,” said Greg Gibbs, director of currency strategy at ABN Amro Holding NV in Sydney. “The further deterioration in term bank- funding costs and spread widening even as policy makers in the U.S. are poised to pass a rescue bill is worrying.”

Central banks are stepping up efforts to revive lending by pumping money into the financial system. The U.S. House of Representatives will consider a package of measures today that would remove tainted assets from bank balance sheets.

“In these extraordinary market conditions, the Bank of England will take all actions necessary to ensure that the banking system has access to sufficient liquidity,” Governor Mervyn King said in a statement in London today.

The Libor-OIS spread, the difference between the three-month dollar rate and the overnight indexed swap rate, climbed 20 basis points to 290 basis points today. It’s the third consecutive day the spread has risen to an all-time high. The average was 8 basis points in the 12 months to July 31, 2007, before the credit squeeze began.

Cash Auctions

The Bank of England will widen the range of collateral it accepts at three-month operations to make it easier for banks in the U.K. to get funds. The central bank said it will now accept top-rated securities tied to “some” corporate and consumer loans as well as asset-backed commercial paper with the highest short-term ratings.

“It’s another thing that shows how serious the situation is,” said Grant Lewis, an economist at Daiwa Securities SMBC Europe Ltd. in London. “Of the central banks, it’s been perhaps the most resistant to providing help.”

The Bank of England also offered $30 billion of one-week funds and $10 billion in overnight loans. The European Central Bank, which said today it will allow more institutions to participate in its unscheduled cash auctions, sold $50 billion of three-day loans. The Bank of Japan pumped in 800 billion yen ($7.6 billion) and the Reserve Bank of Australia added A$1.57 billion ($1.2 billion).

`Injecting Money’

“The Bank of Japan will have to continue injecting money into the market,” said Yuuki Sakurai, general manager of financial and investment planning in Tokyo at Fukoku Mutual Life Insurance Co., which manages the equivalent of $54 billion in assets. “There is a limit to what the BOJ can do, as a lot of investors are avoiding foreign banks at the moment.”

The U.S. Congress passed a $700 billion financial-market rescue plan today designed to unlock credit markets, reversing a rejection that sent global stock markets plunging and threatened to worsen an economic slowdown.

The legislation, a bipartisan effort to restore confidence in the nation’s banking system, authorizes the U.S. government to buy troubled assets from financial institutions reeling from record home foreclosures. The bill contains $149 billion in tax breaks and affirms regulators’ power to suspend asset-valuing rules that companies blame for fueling the crisis.

Rates on three-month Treasury bills declined for a third day, dropping 11 basis points to 0.49 percent. They touched 0.02 percent on Sept. 17, the lowest since the start of World War II.

Central Bank Rates

The likelihood that the squeeze will push the global economy into a recession has made it more probable central banks will cut interest rates. ECB President Jean-Claude Trichet said yesterday policy makers have already considered reducing borrowing costs. Economists at Citigroup Inc., BNP Paribas SA, JPMorgan Chase & Co. and Royal London Asset Management say the Bank of England will cut its rate 50 basis points next week.

The Libor for overnight dollars fell to 1.996 percent today, below the Federal Reserve’s target rate for the first time since Sept. 14 last year. Futures on the Chicago Board of Trade showed a 100 percent chance the Fed will reduce the rate by at least 25 basis points at its Oct. 29 meeting, up from no chance a month ago.

Hong Kong’s three-month interbank rate rose 2 basis points to 3.81 percent today, and Tokyo’s increased 1 basis point to 0.87 percent, both the highest since December. Singapore’s rate for U.S. dollar loans climbed 11 basis points to 4.27 percent, the most expensive since Jan. 11.

Libor’s Reach

“The interbank lending market remains clogged up as banks hoard cash,” said Joshua Williamson, a senior strategist at TD Securities in Sydney. “Funding pressures look likely to remain high and the longer they stay up there the greater the chance banks will pass on those costs to clients.”

Libor, set before noon in London every day after a survey conducted by the British Bankers’ Association on the cost of dollars, euros and eight other currencies, determines prices for financial contracts valued at $393 trillion as of Dec. 31, influencing consumer interest rates on everything from home loans to credit cards. Euribor, a survey of 37 banks solely on the cost of borrowing euros, is fixed by the European Banking Federation about two hours earlier.

Interbank rates have soared for a third week as governments in Europe and the U.S. rescued at least six financial institutions in the past five days. Writedowns and losses around the world have surpassed $588 billion since the start of last year, according to data compiled by Bloomberg.

The difference between what banks and the U.S. Treasury pay to borrow money for three months, the so-called TED spread, was at 386 basis points today. The spread was 113 basis points a month ago.

To contact the reporters on this story: Justin Carrigan in London at jcarrigan@bloomberg.net

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