Money Market Stress Worsens in London, Europe Despite Bailout Bill

The specter of six major financial institutions failing in a mere two weeks has confirmed the wisdom of banks’ tendency to hang onto their money and not lend it out to their bretheren. The bailout bill passed last week appears to have made nary a dent in the tightfistedness; it’s an open question as to whether a newly bulked up TAF auction today (three times its former size) will have any impact.

From Bloomberg:

The euro interbank offered rate, or Euribor, that banks charge each other for three-month euro loans advanced 1 basis point to 5.35 percent today, a seventh straight all-time high, European Banking Federation data showed. Borrowing in dollars for three months in London increased to about 4.4 percent, said Jan Misch, a trader in Stuttgart at Landesbank Baden-Wuerttemberg, Germany’s biggest state-owned bank. Asian rates rose and the Libor-OIS spread, a gauge of cash scarcity among banks, widened to a record.

“Money market conditions will continue to be very tight and this will not improve in the short term,” said Dwyfor Evans, a foreign-exchange strategist at State Street Global Markets in Hong Kong. “There’s an absence of trust.”…

The Libor-OIS spread, the difference between the three-month dollar rate and the overnight indexed swap rate, rose to 298 basis points today. It was at 129 basis points two weeks ago and 81 basis points a month ago….

The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, widened to 389 basis points, the most since Bloomberg began compiling the data in 1984….

Banks borrowed the most since February 2001 from the European Central Bank at its emergency rate as the credit crunch worsened. Financial institutions borrowed 24.6 billion euros ($33.4 billion) for overnight on Oct. 3 at the central bank’s marginal lending rate of 5.25 percent, which is one percentage point above its benchmark rate. At the same time, banks deposited 38.9 billion euros with the ECB, the Frankfurt-based central bank said in a statement today. The deposit rate is 3.25 percent.

The Euribor for one-month loans in euros advanced 2 basis points to 5.15 percent today, reaching a record for a fifth day, according to the EBF.

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  1. David Habakkuk

    David Habakkuk said…

    The serious of the crisis in Europe is sinking in (finally) and precipitating very dramatic changes in thinking.

    The UK Chancellor, Alastair Darling, and the BoE Governor, Mervyn King, are working on plans based upon the Swedish model, as the report in this morning’s FT brings out:

    ‘The scheme, which has echoes of a similar operation by the Swedish government in the early 1990s, would be available to all banks. In exchange for the capital injection, taxpayers might be protected through preferred shares or warrants, giving them generous dividends in future.’


    Of critical importance is the article in the paper endorsing this planning by the Tory leader, David Cameron. It concludes by explaining that Cameron is today discussing the crisis with ‘Carl Bildt, the Swedish prime minister who 15 years ago showed how a centre-right government can intervene decisively in a financial crisis while protecting the taxpayer.’


  2. Ginger Yellow

    “The specter of six major financial institutions failing in a mere two weeks has confirmed the wisdom of banks’ tendency to hang onto their money and not lend it out to their bretheren.”

    A bit of a self-fulfilling prophecy, no? The proximate reason these banks failed is because other banks wouldn’t lend to them.

  3. spare some change?

    “The specter of six major financial institutions failing in a mere two weeks has confirmed the wisdom of banks’ tendency to hang onto their money and not lend it out to their bretheren.”

    In other words, to save the world’s financial system we need everyone to get together in unison and clap their hands saying, “I do believe in fairies!”

    Sarkozky is now calling for a ‘new world order’ that rewards investment over speculation.


    Oh, right, bubbles are good when they inflate but not when they burst. Shock doctrine capitalism at work. You’ll find the powerful and well connected are in charge of this new world order.

  4. Matt Dubuque

    Matt Dubuque

    The Fed, in coordination with other central banks needs to undertake a substantial open market operation to SELL the shorter maturity government paper and BUY three to six month paper.

    This will assist many different term structures.

    Matt Dubuque

  5. Curlydan

    David H.,

    At least the British have plans for a Swedish model. London Banker’s blog ( posits that the British are a bit less greedy than Americans, and it appears that they are trying a more equitable solution.

    On this side of the pond, we’re ready to buy $700B of toxic assets while outsourcing the management of the assets to the same Wall Street firms causing the mess.

    Bad Americans!!

  6. Douglas

    Geeze how long can weakness in the USD and the strength in TBONDS coexist?

    hey Doc you out there?

  7. David Habakkuk


    I am not sure whether or not London Banker is right in suggesting we are less greedy on our side.

    What does I think puzzle me and I think others is the curious arbitrariness in what many American politicians seem to regard as acceptable and unacceptable forms of state intervention.

    I wonder whether, now the pressures to guarantee deposits are becoming overwhelming, the logic of the events may push European governments in Swedish directions with surprising rapidity.

    If it did, would this have any significant effect on American debates?

  8. Juan

    Hey Yves,

    Aren’t a lot of ARM loans linked to LIBOR?

    Is this continued stress going to seriously compound ARM-loan default rates in the upcoming months?

Comments are closed.