Signs of Contagion: Interest Rates Rise in Asia

Bloomberg gives a recap of the some of the credit market reaction in Asia, which is that borrowing has become, not surprisingly, more costly. Rates moved up even in Japan, whose banks are virtually unaffected by the financial crisis (out of a total $1 trillion plus in subprime debt, only an estimated $8 billion went to Japan).

From Bloomberg:

Asian borrowing costs rose, with Japanese and Singapore money market rates reaching the highest in at least eight months, even as central banks pumped in cash to ease lending after U.S. lawmakers rejected a banking rescue.

Japan’s overnight call loan rate rose to 0.6 percent, the highest in more than six weeks, and the three-month interbank offered dollar rate in Singapore jumped 11 basis points, or 0.11 percentage point, to an eight-month high of 3.90 percent as banks hoarded cash. Australian funding costs surged by the most since July.

“Counterparty fear in the banking sector is at a new extreme,” said Greg Gibbs, director of currency strategy at ABN Amro Holdings Bank NV in Sydney. “Credit conditions are as tight as a drum. Unless this settles down, central banks would need to cut rates globally to bring funding costs down.”…

The three-month interbank offered rate in Hong Kong rose by the most in nearly a week to 3.664 percent. The difference between the rate Australian banks charge each other for three- month loans and the overnight indexed swap rate jumped 14 basis points to 98 points, close to a six-month high. The gap has averaged 45 basis points this year.

“This crisis is not driven by corporate defaults but by a systematic failure of the banks themselves,” said Anita Yadav, head of credit and hybrid research at UBS AG in Sydney. “It’s no longer about just paying higher borrowing costs, but also about being able to get the money from the market at all.”

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  1. alan von altendorf

    Roubini says lower rates (to zero?) and on the other side of the world Australian govt, ABM Amro and UBS are all saying the same thing, need to dramatically lower interest rates pronto.

    I don’t think it matters. Japan tried it, didn’t change anything. Let the credit markets decide what rates should be — sky high, most likely, to offset credit risk.

    Official rates are hooey. If govts really want to help, they should cut taxes and get the hell out of the way.

  2. Anonymous

    Futures going vertical, another dozen handles and the entire “post vote” decline will have been eliminated. Somehow, somewhere, somebody has solved something. Fear? what Fear?

  3. River

    If rates are lowered to zero then the currency is at risk of becoming a ‘carry trade’ or ‘carry currency’, as happened to the Yen.

    The case for inflation in the near term is zilch. Dollars are being withdrawn via deflationary losses far faster than dollars are being added by the Fed and this will continue to be the situation untill housing has corrected to affordable levels.

    Most people are in denial about the collapse of the value of their homes and are unwilling to sell for their ‘new value’. Sound familiar?

    The unwind is far from over and if hyper inflation is to occur it will be after the leverage unwind, imo. At this time I see no mechanisim for the government to pump more money into the system than is being destroyed by deflationary forces.


  4. a

    As I understand it Japanese banks have been reluctant to lend JPY to European and American banks for six months or longer, so the funding for the latter is (again) much higher.

  5. PureGuesswork

    Overnight dollar libor 6.875%
    (slightly above o/n sterling and over 200 basis pts above o/n euro). Buddy, can u spare a dime?

  6. Anonymous

    Is it possible the Central Banks might scare the Banks by saying that if you won’t start lending we (the Central Banks) might start lending directly to large corporations and to– god forbid– HEDGE FUNDS… A crazy thought for crazy times..

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