Money-Market Rates Double Amid Global Credit Seizure (Update2)
By Gavin Finch and Kim-Mai Cutler
Sept. 16 (Bloomberg) -- The cost of borrowing in dollars overnight more than doubled to the highest since 2001 as the collapse of Lehman Brothers Holdings inc. and credit downgrades of American International Group Inc. led banks to hoard cash.
The overnight dollar rate soared 3.33 percentage points to 6.44 percent today, its biggest jump, according to the British Bankers' Association. The rate was 2.19 percent a month ago and 2.15 percent last week. Lehman filed for bankruptcy yesterday after succumbing to mounting credit-market losses.
The credit squeeze deepened after American International Group Inc.'s debt ratings were downgraded by Standard & Poor's and Moody's Investors Service, threatening the company's efforts to raise emergency funds. The biggest U.S. insurer by assets is seeking $70 billion to $75 billion in loans arranged by Goldman Sachs Group Inc. and JPMorgan Chase & Co. to replenish capital, according to two people familiar with the situation.
``It's fear, you don't know who has exposure and who might not be getting their money anymore,'' Imke Jersch, a senior money-market trader in Hanover at Norddeutsche Landesbank Girozentrale AG, Germany's fourth-biggest state-owned bank. ``It's a domino effect. You never know who might fall next.''
Cash Injections
Demand for short-term cash is surging even as central banks from the Federal Reserve to the Bank of Japan seek to revive lending through emergency-cash injections. The increase underscores how the credit seizure that started in August 2007 with the collapse of the U.S. subprime-mortgage market is worsening, causing more than a dozen U.S. banks to fail.
The difference between the London interbank offered rate for three-month dollar loans and the overnight indexed swap rate, the Libor-OIS spread that measures the availability of funds in the market, widened 15 basis points to 120 basis points, the most since at least December 2001. That compares with an average of 8 basis points in the 12 months to July 31, 2007, before the credit squeeze started.
The cost of borrowing euros for one week jumped 7 basis points to 4.49 percent today, the highest level since Dec. 24, according to the European Banking Federation. It was the biggest increase since July 3.
The New York Fed said today it will ``shortly'' arrange a ``large'' injection of funds into money markets. It also ``stands ready to arrange further operations later in the day as needed,'' it said in a statement.
Rate-Cut Bets
Traders raised bets the Fed will cut interest rates at a meeting today. Futures on the Chicago Board of Trade showed a 90 percent chance the central bank will lower its 2 percent target rate by a quarter-percentage point, compared with 68 percent yesterday and no chance a week ago. Policy makers are scheduled to announce their decision at 2:15 p.m. in Washington.
``It's all a mess out there, it's unbelievable, it's very tough,'' said Padhraic Garvey, head of investment-grade strategy in Amsterdam at ING Bank NV. ``There really is no sign of this going away. If the Fed were to cut rates, it's not necessarily going to solve anything.''
The European Central Bank, Bank of England and Swiss National Bank also offered financial institutions emergency cash for a second day. The Frankfurt-based ECB offered 70 billion euros ($100 billion) in a one-day refinancing operation. The Bank of England injected 20 billion pounds ($36 billion). The SNB also said it will offer overnight cash.
Writedowns, Losses
Financial institutions have posted more than $514 billion in losses and writedowns since the beginning of last year as the U.S. mortgage crisis deepened. Bank of America Corp., the biggest U.S. consumer bank, agreed to acquire Merrill Lynch & Co. yesterday for about $50 billion.
The seizure in the credit markets and increase in short- term borrowing costs this year triggered doubts over the validity of Libor, which is administered by the London-based British Bankers' Association and is used to calculate rates on $360 trillion of financial products worldwide.
To contact the reporters on this story: Gavin Finch in London at [email protected]; Kim-Mai Cutler in London at [email protected]
Last Updated: September 16, 2008 08:43 EDT
By Gavin Finch and Kim-Mai Cutler
Sept. 16 (Bloomberg) -- The cost of borrowing in dollars overnight more than doubled to the highest since 2001 as the collapse of Lehman Brothers Holdings inc. and credit downgrades of American International Group Inc. led banks to hoard cash.
The overnight dollar rate soared 3.33 percentage points to 6.44 percent today, its biggest jump, according to the British Bankers' Association. The rate was 2.19 percent a month ago and 2.15 percent last week. Lehman filed for bankruptcy yesterday after succumbing to mounting credit-market losses.
The credit squeeze deepened after American International Group Inc.'s debt ratings were downgraded by Standard & Poor's and Moody's Investors Service, threatening the company's efforts to raise emergency funds. The biggest U.S. insurer by assets is seeking $70 billion to $75 billion in loans arranged by Goldman Sachs Group Inc. and JPMorgan Chase & Co. to replenish capital, according to two people familiar with the situation.
``It's fear, you don't know who has exposure and who might not be getting their money anymore,'' Imke Jersch, a senior money-market trader in Hanover at Norddeutsche Landesbank Girozentrale AG, Germany's fourth-biggest state-owned bank. ``It's a domino effect. You never know who might fall next.''
Cash Injections
Demand for short-term cash is surging even as central banks from the Federal Reserve to the Bank of Japan seek to revive lending through emergency-cash injections. The increase underscores how the credit seizure that started in August 2007 with the collapse of the U.S. subprime-mortgage market is worsening, causing more than a dozen U.S. banks to fail.
The difference between the London interbank offered rate for three-month dollar loans and the overnight indexed swap rate, the Libor-OIS spread that measures the availability of funds in the market, widened 15 basis points to 120 basis points, the most since at least December 2001. That compares with an average of 8 basis points in the 12 months to July 31, 2007, before the credit squeeze started.
The cost of borrowing euros for one week jumped 7 basis points to 4.49 percent today, the highest level since Dec. 24, according to the European Banking Federation. It was the biggest increase since July 3.
The New York Fed said today it will ``shortly'' arrange a ``large'' injection of funds into money markets. It also ``stands ready to arrange further operations later in the day as needed,'' it said in a statement.
Rate-Cut Bets
Traders raised bets the Fed will cut interest rates at a meeting today. Futures on the Chicago Board of Trade showed a 90 percent chance the central bank will lower its 2 percent target rate by a quarter-percentage point, compared with 68 percent yesterday and no chance a week ago. Policy makers are scheduled to announce their decision at 2:15 p.m. in Washington.
``It's all a mess out there, it's unbelievable, it's very tough,'' said Padhraic Garvey, head of investment-grade strategy in Amsterdam at ING Bank NV. ``There really is no sign of this going away. If the Fed were to cut rates, it's not necessarily going to solve anything.''
The European Central Bank, Bank of England and Swiss National Bank also offered financial institutions emergency cash for a second day. The Frankfurt-based ECB offered 70 billion euros ($100 billion) in a one-day refinancing operation. The Bank of England injected 20 billion pounds ($36 billion). The SNB also said it will offer overnight cash.
Writedowns, Losses
Financial institutions have posted more than $514 billion in losses and writedowns since the beginning of last year as the U.S. mortgage crisis deepened. Bank of America Corp., the biggest U.S. consumer bank, agreed to acquire Merrill Lynch & Co. yesterday for about $50 billion.
The seizure in the credit markets and increase in short- term borrowing costs this year triggered doubts over the validity of Libor, which is administered by the London-based British Bankers' Association and is used to calculate rates on $360 trillion of financial products worldwide.
To contact the reporters on this story: Gavin Finch in London at [email protected]; Kim-Mai Cutler in London at [email protected]
Last Updated: September 16, 2008 08:43 EDT
