Little Sign of Relief in Interbank Markets Despite Massive Intervention

Although the stock market has taken considerable cheer from the monumental action by central banks to try to restore interbank lending to something resembling normalcy, the results to date have been meager. However, hope remains that improvement will continue, albeit at a slow pace.

From the Financial Times:

The costs for banks to borrow money from each other remain at highly elevated levels in spite of the global government action taken to cure the paralysis at the heart of the financial system…

Analysts said that while stock markets had rallied and the cost of protecting bank debt against default had tumbled by record amounts in the US, it would take time for the reduced costs of what is in effect government-sponsored funding to show through.

Three-month Libor, the most important interbank lending rate that is used to price loans, derivatives and many other kinds of financial products, has barely moved in sterling markets, which have had full details of the UK government guarantee since Monday morning.

Sterling three-month Libor was just 2 basis points lower at about 6.25 per cent, more than 2 percentage points above where markets are pricing UK interest rates and higher than where the rate set before last week’s co-ordinated interest rate cuts by major economies.

Similarly, euro three-month Libor, which was down 7.37bp at 5.225 per cent on Tuesday remains high.

“The fact that the boldest banking guarantee in history was not worth more . . . raised some eyebrows,” said Christoph Rieger, analyst at Dresdner Kleinwort.

Dollar three-month Libor is reacting better, down 11.75bp at 4.635 per cent, which was accompanied by a 15bp rise in the yield on three-month Treasury bills to 0.4 per cent.

This leaves the so-called Ted spread, which measures the difference between interbank lending rates and risk-free government lending rates, at a hefty 420bp. “These developments suggest that the market is reducing the odds of imminent financial Armageddon, but that significant year-end funding issues remain,” said TJ Marta, strategist at RBC Capital Markets.

Lou Crandall, economist at Wrightson Icap, said: “Heightened concerns about counterparty risk may have been the major reason for the initial pullback from the term money markets last month, but investors’ worries about their own liquidity exposure could make them slow to [return].”

An explanation for this conundrum may come from Nouriel Roubini via Bloomberg (hat tip reader Dwight):

Roubini said total credit losses resulting from the meltdown of the subprime mortgage market will be “closer to $3 trillion,” up from his previous estimate of $1 trillion to $2 trillion. The International Monetary Fund estimated $1.4 trillion on Oct. 7. Financial firms have so far reported $637 billion in losses, according to data compiled by Bloomberg

If you take Roubini’s forecast to heart, we are less than a quarter of the way through this crisis, but even based on the less alarming IMF forecast, we have yet to reach the half-way point.

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  1. TulsaTime

    Banks don’t lend to banks because of credit risk. Banks don’t lend to people because of credit risk, not the people’s but their own. Perhaps banks should go into a different line of work if loaning is too risky. Perhaps the government should just take all the money going to banks and give/loan it to people, since it is too scary for the banks anymore?????

  2. wintermute

    It would be nice to have some detail behind Roubini’s significant change in estimate of credit losses. Just increased by 100%.
    Surely the projected decline in G7 residential property has not increased much lately. We know car loans, credit cards and CRE are falling off a cliff. We know CDS liabilities and general deleveraging has still far more to run. But what suddenly got 100% worse?

  3. doc holiday

    A few billion in market tokens for the burning casinos is just chump change and meaningless when people like J6P are worried about cash being in short supply (today and in the future). Re-building market confidence is a long process not just an event at a press conference!

    Take that to the bank!

  4. Mike Barton

    Perhaps the government should just take all the money going to banks and give/loan it to people, since it is too scary for the banks anymore?????

    Sometimes I wonder if this is EXACTLY where we are going to end up.

  5. Pete

    >>>Perhaps the government should just take all the money going to banks and give/loan it to people, since it is too scary for the banks anymore?????<<<

    And when these gov’t loans default, how much will the next round of bailouts cost?

    The problem is that people acn’t afford to service existing debt, so they are defaulting. This is why the banks are JUSTIFIABLY not in the mood to lend.

    Having the gov’t make the loans doesn’t improve anyone’s financial condition or raise J6P’s wages.

  6. Wendy

    Dear Yves,

    I felt a shrill of fear and sadness when I read of your concern for your 81 year old mother. This is causing us all deep and intimate fears and no one seems to know what the future will hold or which road to take. I hope that your mother will live the rest of her days in peace. One thing she does have is a daughter to be proud of and share with. This is perhaps better than all the gold that used to be in fort knox.

    I do find that I call my mother more often these days and that I find my heart more rich, even if my account balance is at zero. I know this does not make up for the very real fear but it does help me face it.

    I hope we all find some blessing in this very unsure present and future.

  7. Anonymous

    Since there is only 1 trillion in credit card debt in the USA, I wonder if the US government shouldn’t just buy out 50% of that debt.

    This would certainly buoy consumer spirits and promote consumption.

    That would be putting my taxes to work!

  8. Juan


    Apparently you’ve yet to recieve the new and improved* 0.00 APR Federal Reserve credit card,,,must have been the holiday.

    *A nice rhodium/platinum alloy.

  9. luther

    a couple questions for the naked gallery:

    1) does anyone know the $ amount of ARM mortgages attached to LIBOR currently outstanding?

    2) for a monthly payment on an ARM, on what date do they usually take for the LIBOR calculation (or is it a monthly average)?

    i’m googling right now, but efforts have so far been futile, so any assistance is much appreciated.

  10. john c. halasz


    ARM’s reset every 6 months or every year, after the initial fixed rate period, usually 2 years, and LIBOR is taken and set on a strike date, depending on the date when the loan was closed.

  11. Anonymous

    How is it that so few economists and economics reporters question the accuracy and reliability of LIBOR fixing?

    In times of turmoil when there are very few real-world transactions — why use interbank borrowing when the central banks will hand you cheap money? — a bunch of twenty-somethings sitting in a City pub and making it up as it and their alcohol uptake goes rules the public financial policy of the world.

  12. Abbott_Of_Iona

    And now the TRUTH.

    It had nothing to do with liquidity. It was always about solvency.

    ” at a hefty 420bp. “These developments suggest that the market is reducing the odds of imminent financial Armageddon, but that significant year-end funding issues remain,” said TJ Marta, strategist at RBC Capital Markets.”

    If unbridled credit expansion infested human consciousness then unbridled credit contraction will insist on invading human reality.

    Who is Hank Paulson?

    Who are Goldman Sachs?

    Why are they doing this?

    It makes no sense.

  13. luther

    thanks john.

    interesting that october’s LIBOR is still the lowest in 4 years.

    looking at this chart:

    is simply amazing after reading conjure’s white paper on LIBOR over at calculated risk on sunday night.

    here’s my favorite line from it–

    LIBOR contributors on the other hand provide the rate at which they believe they could borrow should they propose so to do.

    that line alone deserves the daily show treatment.

  14. Max

    A question for the pros:

    looking at the figures of the recapitalisation plan, I couldn’t help but notice how small the actual numbers are. For instance, Citibank receiving $25B, which won’t make a dent in the steaming pile of sh** on its books.

    What’s the point of this plan so early in the game, spreading out all these money when it isn’t even clear who is worth it?

  15. Anonymous


    $25 billion looks a lot like

    “Just how much junk will be the focus of investors on Thursday, when Citigroup will report what Ms. Whitney says will be “ugly” third-quarter results. Citigroup has already marked down the value of $22 billion of mortgage-linked securities on its balance sheet to 61 cents on the dollar — a figure some analysts say they believe is still far too high.”

    I say mark the junk to zero. It will surprise on the upside for a change if it ever recovers.

  16. Anonymous


    Why are they doing this?

    Maybe protecting incomes of elites while leaving the rest of us to compete globally for jobs.

    The US is noted for the most mobile work force in the developed world, perhaps the vision is to expand that model into the wide wide global competitive labor jungle.

    Just musing ….

Comments are closed.