Bloomberg reports that despite the latest balm to the credit markets, that of offers of emergency funds that would tide banks over the typical end-of-year reduction in liquidity, Libor has nevertheless increased to the highest level since 2001.
The problem, of course, is the the reason funding is tight is that banks are worried about counterparty risk. Cheaper funding is not going to make them assess those exposures any differently. This does not bode well for the efficacy of further rate cuts by the Fed.
Money-market rates rose, driving the cost of borrowing in euros for three months to a six-year high, after central banks failed to quell concerns about year-end cash needs and losses linked to U.S. subprime mortgage defaults.
The London interbank offered rate for euro loans rose 3 basis points to 4.81 percent, the highest since May 2001, the British Bankers’ Association said. The increase came even after the European Central Bank today extended the maturity of a regular refinancing operation through the end of the year. The rates for dollars and pounds also climbed.
The ECB, the Bank of England and the Federal Reserve have all offered emergency funds this week to soothe concerns that credit conditions will deteriorate at the end of the year….
“Central banks don’t have the tools to arrest this rise in Libor because the issue is no longer about liquidity, it’s about credit concerns,” said John Wraith, London-based head of U.K. interest-rate strategy at Royal Bank of Scotland Plc, the second-biggest U.K. bank. “If banks aren’t willing to lend to one another, there’s nothing central banks can do.”
The gap between the rate on three-month interbank euro loans and the ECB’s benchmark rate, which currently stands at 4 percent, is the highest since the central bank took charge of monetary policy in 1999….
Bank of England Governor Mervyn King said yesterday there’s a risk a further drop in asset prices “might impair the balance sheets of the banking system in the U.S., which would lead to a classic credit squeeze.”
King drew a distinction between the rise in credit costs in August and September, stemming from the plunge in the U.S. market for subprime mortgages, and the latest increase. He said the first round was driven by concerns about banks’ liquidity and the latest by concerns about the health of their balance sheets