Libor Rises Most Since 1999 as Banks Shun Money-Market Lending
By Gavin Finch and David Yong
Sept. 25 (Bloomberg) -- Money-market rates around the world soared on concern the U.S. Treasury's $700 billion bailout plan will be diluted as it makes its way through Congress, causing banks to hoard cash to meet their future funding needs.
The three-month London interbank offered rate, or Libor, that banks charge each other for dollar loans jumped today by the most since 1999 and the euro rate rose to the highest level since November 2000. Rates in Hong Kong and Singapore climbed as Bank of East Asia Ltd. faced a run on deposits. The Libor-OIS spread, a measure of the availability of cash among banks, widened to the most on record.
``Liquidity in the money markets in maturities over a week is desperately scarce,'' said Tim Bond, head of global asset allocation at Barclays Capital in London. ``A near-term solution to the crisis is urgent. Unchecked, the current crisis would turn into a self-reinforcing vortex of defaults, bank-capital contraction and deep recession within a matter of weeks.''
Money-market rates signal banks have all but stopped lending to each other. Treasury Secretary Henry Paulson's bailout plan, which proposes removing tainted assets from bank balance sheets, may be cut back in size, U.S. House Budget Committee Chairman John Spratt said today. The U.S. faces a ``painful'' recession if the package isn't approved, President George W. Bush said yesterday.
`Nothing's Working'
Banks are balking at lending to each other because they are concerned counterparties may hold tainted assets at a time when demands on their own cash are rising. General Motors Corp. on Sept. 19 said it would draw the remaining $3.5 billion from a $4.5 billion revolving credit line from banks, a decision Chief Executive Officer Rick Wagoner described today as ``defensive.''
The Libor-OIS spread, which measures the difference between the three-month dollar rate and the overnight indexed swap rate, widened 32 basis points to 199 basis points today, and exceeded 200 basis points for the first time. It averaged 8 basis points in the 12 months to July 31, 2007, before the credit squeeze began.
``The message coming from our money-market traders is that nothing's working,'' said Padhraic Garvey, the Amsterdam-based head of investment-grade debt strategy at ING Bank NV. ``Banks are not dealing with one another and the situation has gotten worse. The real market is probably about 10 to 20 basis points above where Libor fixings are.''
Stocks, Bills
Stocks in the U.S. and Europe rose and Treasury bills dropped as investors speculated that Congress will eventually approve some measures to cleanse bank balance sheets. The Standard & Poor's 500 Index increased 2.4 percent and Europe's Dow Jones Stoxx 600 Index climbed 2 percent. The yield on the three-month Treasury bill rose to 0.77 percent, still down from 1.61 percent two weeks ago.
The stock gains came several hours after money-market rates were set. The Libor for dollars, euros and eight other currencies is ``fixed'' once a day following a survey of 16 participant banks by the London-based British Bankers' Association and published before noon local time.
The turmoil in money markets is rippling through the economy. General Electric Co. cut its earnings forecast today and said it will pare back GE Capital's commercial paper to between 10 percent and 15 percent of total debt. Pilgrim's Pride Corp., the biggest U.S. chicken producer, expects to breach one of its credit covenants because it will post a ``significant'' fourth-quarter loss.
Fortis, the financial-services company that set out in June to bolster capital by 8.3 billion euros ($12.2 billion), tumbled as much as 21 percent in Brussels trading, the most since it was formed in 1990, on concern it needs help with funding.
`Systemic Risks'
The drop is ``linked to rumors that every Belgian citizen is frightened by Fortis,'' said Scander Bentchikou, a Paris- based analyst at Oddo Securities. ``Lots of people say they should diversify and fear a drop in the deposit base.''
``We don't have any indication of the withdrawal of customers,'' said Fortis spokeswoman Liliane Tackaert in Brussels. The shares ended the day down 6.3 percent.
Short-term borrowing by companies has plunged as borrowing costs surged. The U.S. commercial paper market slumped $61 billion, or 3.5 percent, to a seasonally adjusted $1.7 trillion in the week ended Sept. 24, the Federal Reserve said today in Washington. On a non-seasonally adjusted basis, the market dropped $44 billion to $1.64 trillion.
``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.''
Hong Kong, Singapore
By Gavin Finch and David Yong
Sept. 25 (Bloomberg) -- Money-market rates around the world soared on concern the U.S. Treasury's $700 billion bailout plan will be diluted as it makes its way through Congress, causing banks to hoard cash to meet their future funding needs.
The three-month London interbank offered rate, or Libor, that banks charge each other for dollar loans jumped today by the most since 1999 and the euro rate rose to the highest level since November 2000. Rates in Hong Kong and Singapore climbed as Bank of East Asia Ltd. faced a run on deposits. The Libor-OIS spread, a measure of the availability of cash among banks, widened to the most on record.
``Liquidity in the money markets in maturities over a week is desperately scarce,'' said Tim Bond, head of global asset allocation at Barclays Capital in London. ``A near-term solution to the crisis is urgent. Unchecked, the current crisis would turn into a self-reinforcing vortex of defaults, bank-capital contraction and deep recession within a matter of weeks.''
Money-market rates signal banks have all but stopped lending to each other. Treasury Secretary Henry Paulson's bailout plan, which proposes removing tainted assets from bank balance sheets, may be cut back in size, U.S. House Budget Committee Chairman John Spratt said today. The U.S. faces a ``painful'' recession if the package isn't approved, President George W. Bush said yesterday.
`Nothing's Working'
Banks are balking at lending to each other because they are concerned counterparties may hold tainted assets at a time when demands on their own cash are rising. General Motors Corp. on Sept. 19 said it would draw the remaining $3.5 billion from a $4.5 billion revolving credit line from banks, a decision Chief Executive Officer Rick Wagoner described today as ``defensive.''
The Libor-OIS spread, which measures the difference between the three-month dollar rate and the overnight indexed swap rate, widened 32 basis points to 199 basis points today, and exceeded 200 basis points for the first time. It averaged 8 basis points in the 12 months to July 31, 2007, before the credit squeeze began.
``The message coming from our money-market traders is that nothing's working,'' said Padhraic Garvey, the Amsterdam-based head of investment-grade debt strategy at ING Bank NV. ``Banks are not dealing with one another and the situation has gotten worse. The real market is probably about 10 to 20 basis points above where Libor fixings are.''
Stocks, Bills
Stocks in the U.S. and Europe rose and Treasury bills dropped as investors speculated that Congress will eventually approve some measures to cleanse bank balance sheets. The Standard & Poor's 500 Index increased 2.4 percent and Europe's Dow Jones Stoxx 600 Index climbed 2 percent. The yield on the three-month Treasury bill rose to 0.77 percent, still down from 1.61 percent two weeks ago.
The stock gains came several hours after money-market rates were set. The Libor for dollars, euros and eight other currencies is ``fixed'' once a day following a survey of 16 participant banks by the London-based British Bankers' Association and published before noon local time.
The turmoil in money markets is rippling through the economy. General Electric Co. cut its earnings forecast today and said it will pare back GE Capital's commercial paper to between 10 percent and 15 percent of total debt. Pilgrim's Pride Corp., the biggest U.S. chicken producer, expects to breach one of its credit covenants because it will post a ``significant'' fourth-quarter loss.
Fortis, the financial-services company that set out in June to bolster capital by 8.3 billion euros ($12.2 billion), tumbled as much as 21 percent in Brussels trading, the most since it was formed in 1990, on concern it needs help with funding.
`Systemic Risks'
The drop is ``linked to rumors that every Belgian citizen is frightened by Fortis,'' said Scander Bentchikou, a Paris- based analyst at Oddo Securities. ``Lots of people say they should diversify and fear a drop in the deposit base.''
``We don't have any indication of the withdrawal of customers,'' said Fortis spokeswoman Liliane Tackaert in Brussels. The shares ended the day down 6.3 percent.
Short-term borrowing by companies has plunged as borrowing costs surged. The U.S. commercial paper market slumped $61 billion, or 3.5 percent, to a seasonally adjusted $1.7 trillion in the week ended Sept. 24, the Federal Reserve said today in Washington. On a non-seasonally adjusted basis, the market dropped $44 billion to $1.64 trillion.
``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.''
Hong Kong, Singapore
