Reply #17: Money-Market Rates Increase on Bailout-Delay Concern [View All]

[Ghost Dog]

Sept. 25 (Bloomberg) -- Money-market rates rose on concern the U.S. Treasury's $700 billion bailout plan will be delayed or diluted, causing financial institutions to hoard cash.

The euro interbank offered rate, or Euribor, that banks charge each other for one-month loans rose today to the highest level since December 2000. Three-month rates in Hong Kong and Singapore also climbed as Bank of East Asia Ltd. faced a run on deposits. The difference between the London interbank offered rate for three-month dollar loans and the overnight indexed swap rate, the Libor-OIS spread, widened to the most on record.

``The conditions are revealing a new level of breakdown in the global financial system that central banks appear powerless to fix,'' Greg Gibbs, director of foreign-exchange strategy at ABN Amro Bank NV in Sydney, wrote in a research note today. ``There's an element of end-quarter demand for liquidity intensifying the problem.''

Money-market rates signal banks have all but stopped lending to each other. Treasury Secretary Henry Paulson's bailout plan, which proposes moving tainted assets from bank balance sheets to a new institution, has met resistance from Congress. The U.S. faces a ``painful'' recession if the measure isn't approved, President George W. Bush said yesterday.

The Libor-OIS spread widened 2 basis points to 169 basis points today, the most since at least December 2001. It averaged 8 basis points in the 12 months to July 31, 2007, before the credit squeeze started.

Bank Run

``Systemic risks are extremely high, and the outlook appears bleak,'' said Laurence Mutkin, the London-based head of European fixed-income strategy at Morgan Stanley. ``Term lending markets appear almost to have closed, while cash hoarding continues.''

The cost of one-month loans in euros climbed 7 basis points to 4.98 percent, the European Banking Federation said today. It was at 4.52 percent a week ago. The three-month rate climbed 7 basis points to 5.12 percent, the highest level since November 2000. Hong Kong's three-month rate rate rose 13 basis points, advancing for a third day, to 3.80 percent, the highest level since December 2007.

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Chinese lenders, including Industrial and Commercial Bank of China, have set tighter standards on credit lines with international finance companies, according to people at the banks' treasury departments who declined to be named. Others like China Citic Bank Corp. imposed tighter limits on interest- rate swaps to avoid losses.

Singapore's three-month dollar loan rate surged 29 basis points to 3.684 percent today, the highest level since Jan. 22, according to the Association of Banks in Singapore. In Australia, the one-month bank bill swap rate, used to determine yields on variable-rate loans, was 7.458 percent, the highest level since Aug. 5, according to data compiled by Bloomberg.

``The Australian financial system has felt the impact'' of global difficulties, the Reserve Bank of Australia said in its half-yearly Financial Stability Review published today in Sydney. ``The general increase in uncertainty has also meant that most banks are taking a more cautious attitude to lending.''

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Financial institutions around the world have posted $523 billion in losses and writedowns tied to the collapse of the U.S. subprime-mortgage market since the start of last year.

The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, narrowed to 288 basis points today. It was 114 basis points a month ago. The spread increased to 313 basis points on Sept. 18, the most since Bloomberg began compiling the data in 1984.

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