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.
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.
1 mo US dollar Libor is down 7 bips today to 5.03 for a total of 17 bips in two days.
The ten bip inverted spread between 1 mo and 3 mo of last week has been reduced to 3 bps. I don’t know what others were expecting, but I’d say this constitutes at least a measure of success.
The real test will come when the auctions actually take place in a few days.
Actually, it will be interesting to watch the equity markets. They have been blithely chugging along, seemingly disconnected from the near-panic in the credit markets. A big shock and awe announcement from the Fed may, ironically, have the effect of making the average retail investor vaguely aware at last that Houston, we have a problem of some sort. Wile E. Coyote moment for stocks?
>> “It’s not going to help us find an exit to this crisis,”
“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.”….
>>> See junk collateral
This was a coordinated action by five central banks. Although dollar Libor was a target due to the fact that the dollar swaps market is frozen, it is far from the only target. The objective was to reduce the spread between interbank rates and risk free rates, and the assumption (or better word might be hope) that addressing the year-end crunch would break the logjam.
Quotes from the latest Bloomberg update on the same story:
“The markets don’t expect spreads to go down,” said Alexander Titsch-Rivero, head of derivatives and structured products in Frankfurt at BHF-Bank AG, a German private bank. “The actions by the central banks were just a placebo, a tranquilizer that doesn’t solve the problem of the mistrust among banks on one hand and the potential for more losses in credit on the other.”….
The difference between the interest banks and the government pay for three-month loans, called the TED spread, rose to 2.21 percentage points yesterday from 1.59 percentage point on Sept. 18, when the Fed began lowering rates.
“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.”
Perhaps one issue is that the TAF is open only to “depository institutions”. As Nouriel Roubini points out:
Fourth, the actions by the Fed today provide more liquidity to a greater variety of institutions but, as the Fed announced, these institutions are only “depository” institutions, i.e. only banks. The severe liquidity and credit problems affect today a financial market dominated by non-bank that do not have direct access to the liquidity support of the Fed; these include: broker dealers and investment banks that do not have a commercial bank arm; money market funds; hedge funds; mortgage lenders that do not take deposit; SIVs, conduits and other off-balance sheet special purpose vehicles; states and local governments funds (Florida, Orange County, etc.).
Could this turn out to be much like Paulson’s Treasury plan (which was advertised as helping up to 2/3 of subprime borrowers but will probably apply to no more than 15% of them at most)? In other words, mostly psychological impact rather than a real effect…
probably way off base but all this media talk about bank trust seems a bit surreal. Wasn’t very long ago the key words were” world wide saving glut”, now replaced with banks don’t trust one another. Financial and MSM PR workers continue to pump out dribble for the vast media information outlets to ponder.
The RE bubble has popped in the US, the noise you hear happens to be collateral value hissing as it’s value deflates.
LIBOR is a huge target not least ‘cos of the “misgivings” banks have about each other , not to mention what they “think” of non-banks. I agree with anonymous about waiting to see the auctions. If the central banks have difficulty getting the credit to banks then non-banks can tell themselves to forget any christmas respite.
All that jazz about anonymity and no-stigma attached to auctions is pretty much bs , c’mon, it’s not like banks in good shape are gonna want to be taking a loan for 28 days. Besides, as said in an earlier comment, rumours in this type of climate could prove more fatal than the truth, ahh, the merits of transparency.
I have not thought this through, but the high LIBOR-FF Spread not be more the solution than the problem?
Common thinking is that the suffering banks will get better by playing a steep yield curve as in the early 90ties.
Now futures exchanges and derivatives guarantee that everybody can play this game – so it might not work like before.
Take LIBOR on the other hand – it is only a small stream of funding for the banks currently, but a big stream in revenues. Some net interest margins ´have doubled in the last months……