Dec. 17 (Bloomberg) -- The Federal Reserve's plan to provide $20 billion in cash to the world's money markets failed to reduce the cost of borrowing in euros.
The rate banks charge each other for three-month loans held close to a seven-year high, rising 1 basis point, or 0.01 percentage point, to 4.95 percent, the European Banking Federation said today. That's 95 basis points more than the European Central Bank's interest rate. It was 4.58 percent a month ago.
The Fed will today make funds available to banks and financial institutions in an effort to increase the amount of cash available to the banking system. Central banks are responding to more than $70 billion of bank losses on securities linked to the collapse of the U.S. subprime-mortgage market. Money-market rates still indicate financial institutions are reluctant to lend to each other.
``It's going to take a long time for these problems to go away,'' said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. ``These auctions might help stem the pressure until year-end but the bottom line is until we get a clearer picture of how deep the problems are, the banks are going to hoard cash.''
The Board of Governors of the Federal Reserve System established the temporary Term Auction Facility, or TAF, last week to provide cash after cuts in the target rate for overnight loans failed to break banks' reluctance to lend to each other. The program will make funding from the Fed available beyond the 20 authorized primary dealers that trade directly with the central bank.
The rate banks charge for one-week loans dropped 4 basis points to 4.07 percent today, the EBF said.
Goldman Forecast
Global stocks fell. The MSCI World Index lost 1.1 percent. Futures on the Standard & Poor's 500 Index dropped 0.6 percent.
The surge in money-market rates since August is fueling concern that the slump in bank lending will exacerbate a slowdown in global economic growth. Goldman Sachs Group Inc. in a report last month estimated losses related to record home foreclosures may be as high as $400 billion for financial companies. If accurate, banks, brokerages and hedge funds would need to cut lending by $2 trillion, triggering a ``substantial recession,'' the firm said.
``If you're looking at a prolonged credit crunch that constrains the ability of banks to lend, that will have severe economic consequences,'' said Oliver Mangan, chief bond economist in Dublin at AIB Capital Markets, a unit of Ireland's second-biggest bank. ``Central banks would really have to take their gloves off in terms of resolving the problems in interbank lending.''
Coordinated Action
Policy makers in the U.S., U.K., euro region, Switzerland and Canada announced last week their first coordinated action to help financial markets since the Sept. 11, 2001, terrorist attacks. The TED spread, the difference between the rate the government and banks pay for three-month loans, held at 2.1 percentage point today, signaling a muted response to the plan. It has risen 35 basis points since the start of the year.
The fallout from the collapse of the U.S. subprime-mortgage market has been felt across the world. Australia's Centro Properties Group slumped 76 percent today and said it's struggling to refinance debt because of the subprime housing collapse. The U.K. had its first run on a bank in more than a century after Northern Rock Plc got emergency funding from the Bank of England in September. In Florida, schools and towns pulled almost half their money last month from a $27 billion state-run fund after discovering it invested in defaulted and downgraded SIVs.
Implied yields on Euribor futures contracts rose today, with the December contract climbing 1 basis point to 4.94 percent. The implied yield on the March 2008 contract was little changed at 4.62 percent |
