Lending between banks ground to a standstill this week in a graphic illustration of the scale of the crisis in the financial markets. Money market rates were pushed higher, raising funding costs for home owners and companies that borrow money at variable rates of interest. While central banks set overnight rates, floating rate home loans, company borrowing and periodic payments in the vast interest rate derivatives market are determined by the three-month London Interbank Borrowing Rate (Libor) set each day by the British Bankers Association.
Since the credit crunch began in August 2007, Libor in the UK, US and eurozone markets has been extremely elevated when compared with overnight rates set by central banks. This breakdown between policy and borrowing rates for the broader economy has been a constant feature of the credit squeeze, and strains intensified this week.
"Borrowing between banks halted this week, as news of Lehman Brothers' bankruptcy and the US government takeover of American International Group stunned investors who waited in fear of further defaults," said Jack Ablin, chief investment officer at Harris Private Bank. He said the run on US money market funds this week, pushed one-month Libor, a widely tracked money market benchmark, more than 10 times wider than its historical average. The higher bank costs then feed through to higher interest rates across the economy.
The reluctance among banks and other institutions to lend to one another provoked emergency action by central banks on Thursday. Central banks pumped $180bn of dollar funding into markets, however those funds were quickly snapped up by banks and hoarded. Overnight dollar Libor was set at 3.25 per cent yesterday. Although down from a fix of 6.44 per cent on Tuesday, it was still well above last week's setting of 2.14 per cent.
Longer-term Libor settings continued to rise yesterday. The three-month dollar rate was at 3.12 per cent, up from 2.82 per cent a week ago. Sterling Libor fixed at 6 per cent yesterday, up from 5.70 per cent last week.
Source:-http://www.ft.com/cms/s/0/8605eb98-86ad-11dd-959e-0000779fd18c.html |
