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.
From Bloomberg:
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
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In effect, Ben and the boys are syaing, OK, we will give banks a great deal of leverage as they crash, saying we will take rates to zero for as long as it takes….but, they are also saying, we are giving a window of opportunity to investors that want out of the mkt, i.e., take advantage of our actions and get out now while you have a chance, before the crash! This was the lesson learned from the asset bubble in Japan, i.e., everyone had time to get out, but not many did, so our fed is telegraphing the message louder and giving lots of hints and thus screaming for the little guy to bail ASAP!!
Interbank US rates are more or less constant over the next year. Now an efficient market prices in all expectations correctly, so this means if the Fed delivers on the rate cuts the market is currently expecting (no more, no less), the interest rates for the real economy – lendings by banks to companies and so on – will stay stable. The Fed is not so much pushing on a string, as just managing to stand still in a hurricane trying to push it backwards.
The interbank Euro pyramid is *ascending* (as time goes out, interbank rates are going up).