Shock and awe indeed. The markets remain unimpressed after yesterday’s coordinated action by five central banks explicitly to address the lack of liquidity in the money markets. The cost of dollar borrowing did fall slightly, but less than expected. From Bloomberg:
The interest rates banks charge each other for short-term loans remained close to the highest in seven years a day after central banks joined forces to end a lending logjam threatening the global economy.The cost to borrow for three months remained at 4.95 percent, the British Bankers’ Association said today. That’s 95 basis points, or 0.95 percentage point, more than the European Central Bank’s benchmark interest rate, compared with 57 basis points a month ago. The difference averaged 25 basis points in the first half of the year, before losses on securities linked to U.S. subprime mortgages contaminated credit markets.
The highest short-term rates in seven years suggest that the first coordinated central bank action since the Sept. 11, 2001, terrorist attacks may not be enough to revive interbank lending. The cost of borrowing dollars fell 7 basis points to 4.99 percent, about half what was anticipated, based on prices of Libor futures contracts.
“It’s not going to help us find an exit to this crisis,” said Cyril Beuzit, head of interest-rate strategy at BNP Paribas SA in London. “These measures aren’t going to address the root cause of the crisis. Banks are still reluctant to lend money to each other because there are serious concerns about potential further bad news.”….
“It’s a very disturbing sign,” said Christoph Rieger, a fixed-income strategist at Dresdner Kleinwort in Frankfurt. “I’m alarmed by the impact this is having, which underscores that the funding difficulties out there are enormous.”….
U.K. Prime Minister Gordon Brown said the surge in credit costs should spur increased transparency in the banking industry and change the way credit-rating companies work.
“It’s a wake-up call for the global economy,” Brown told lawmakers in Parliament in London today. “The existing institutions aren’t good enough.”
Fed Bank of New York President Timothy Geithner said today that central bankers are looking at “additional instruments” to provide funds to banks in times of stress.
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Usually I agree with your analysis, but I don’t think you called this one right.
A seven bip drop in 3 mo US dollar Libor is big — and this is following on a 5 bip drop yesterday. (The news was leaked at 6am London time.) Of course, Libor is still at unprecedented highs, but the situation is improving.
Furthermore, what the CBs have targeted is 1 mo Libor, which dropped 10 bips yesterday. I don’t have the data on 1 mo for today yet.