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

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


Oct. 3 (Bloomberg) -- Money-market rates jumped to records 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 climbed to 5.33 percent today, an all-time high, the British Bankers' Association said. The corresponding rate for dollars increased to 4.33 percent, the most 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.

``Nobody is willing to lend to anybody for any length of time, not even a month,'' said Robert Ried, president of Jersey City, New Jersey-based Ried, Thunberg & Co., a unit of ICAP Plc, the world's largest inter-dealer broker. ``This is going to inhibit growth. It's beginning to look as if the recession will be long and deep.''

Efforts by central banks around the world to thaw lending by pumping money into the financial system have failed as banks hoard cash on concern loans to other financial institutions won't be repaid. The U.S. House of Representatives will consider a $700 billion package today designed to remove tainted assets from bank balance sheets. The House rejected an earlier version this week.

Economic Disruptions

Disruptions springing from the worst meltdown in financial markets since the Great Depression are rippling through the economy. The U.S. lost the most jobs in five years last month and earnings rose less than forecast as the slowdown deepened, government data showed today. Payrolls fell a more than predicted 159,000, the Labor Department said.

Companies are being squeezed by banks when renewing credit lines. American Capital Ltd., an asset manager in Bethesda, Maryland, had its credit line cut from $1.57 billion to $1.41 billion as of Sept. 29, according to a statement. The interest rate on the credit will increase to 325 basis points over Libor, up from 90 basis points, the company said.

The crisis in the short-term credit markets deteriorated since the collapse of Lehman Brothers Holdings Inc. last month, making it tougher for banks to judge how much they would pay to borrow. The 16 members of the panel that sets the benchmark dollar rate were all submitting similar rates up until Lehman filed for protection from its creditors on Sept. 15. Yesterday, the gap between the highest rate, from Barclays Plc, and the lowest, from Rabobank Groep NV, was 95 basis points.

`Problems Snowballing'

``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.''

The Libor-OIS spread, the difference between the three-month dollar rate and the overnight indexed swap rate, climbed 16 basis points to 286 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.

The difference between what banks and the U.S. Treasury pay to borrow money for three months, the so-called TED spread, was at 385 basis points today. The spread was 113 basis points a month ago.

`Extraordinary Conditions'

The Bank of England widened 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 take top- rated securities tied to ``some'' corporate and consumer loans as well as asset-backed commercial paper with the highest short-term ratings, to counter what Governor Mervyn King described as ``extraordinary market conditions.''

``It's another thing that shows how serious the situation is,'' said Grant Lewis, an economist at Daiwa Securities SMBC Europe Ltd. in London.

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).

House Vote

``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. Senate voted two days ago by 74 to 25 to approve an amended bill that would give the Treasury as much as $700 billion to buy distressed debt from financial companies. The House rejected an earlier version of the legislation on Sept. 29 by 228 to 205 votes. It's scheduled to consider the version passed by the Senate today.

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.

Rate Bets

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 50 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.

``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.

BLOOMBERG