Money Markets Still Stressed; Analyst Forecasts Only Small Decline in Three Month Euro Rates

This Bloomberg story tries to take an oddly cheery tone, when in fact, it reports in effect, than an analyst forecasts that the heroic measures taken to unfreeze interbank lending will not lead to much in the way of a rate reduction. However, if any lending were to take place at the three month tenor, that would still be a considerable improvement.

The story also reports that the change in stress measures yesterday and so far today has been modest to non-existent.

And we’ll see the real impact soon enough, regardless.

From Bloomberg:

European money-market rates may fall after the U.S. joined the U.K., Germany and France in offering to buy stakes in banks as part of measures designed to revive lending and restore confidence to the global financial system.

The cost of borrowing in dollars for three months in London will drop about 15 basis points to 4.60 percent, according to David Buik, a market analyst at BGC Partners….

“What everyone was crying out for was a coordinated central policy response, and that’s what we got,” said Patrick Bennett, a currency strategist with Societe Generale SA in Hong Kong. “What we had was a lack of confidence in the money markets. I think it’s starting to thaw.”..

The London interbank offered rate, or Libor, for three-month dollar loans fell 7 basis points yesterday to 4.75 percent, tied for the steepest drop since March 17, according to data from the British Bankers’ Association. The Libor for three-month cash in euros declined yesterday by the most since Dec. 28.

The dollar Libor-OIS spread, a gauge of demand for cash, was unchanged at 354 basis points today, after narrowing 10 basis points yesterday. It was at 105 basis points on Sept. 15 and 24 basis points on Jan. 24. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, narrowed 2 basis points to 455 basis points, down from 464 basis points on Oct. 10, the most since Bloomberg began tracking the data in 1984.

As we said at the outset, if we see any activity at the three month tenor, that would be progress, even if at a high price. So far, we have yet to hear anecdotes either way.

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  1. Anonymous

    I don’t know much about these things, so here’s a question: if the central banks are providing effectively unlimited refinancing for the banks until at least the beginning of 2009, is there any point in quoting libor and associated measures at all? Surely Libor settings have become an empty ritual, no bids no takers, just pass the port please?

    My feeling is that these markets are permanently broken, and sometime next year some kind of replacement will have to be worked out. In fact that may be a problem, how to wean the banks off the central bank dripfeed. But then, as I said, I don’t know much about these things.

  2. Anonymous

    I think it is important to note that a recessionary period does not necessarily imply a fall in equities.

  3. a

    I’m told that durations shorter than 1M have traded on the USD (vs nothing a week ago), nothing longer. This is what pretty much what you would expect in a world regaining confidence – trading beginning on the shorter terms, then gradually heading to the longer.

  4. Anonymous

    One-Week Dollar Libor Falls for Third Day on Bank-Rescue Plan By Gavin Finch

    Oct. 14 (Bloomberg) — The cost of borrowing in dollars for one week fell the most in almost a month…

    Libor, fell 50 basis points to 4.08 percent today. High was 4.76 percent on Oct. 9. The overnight dollar rate fell 29 bp to 2.18 percent, down from 3.94 percent a week ago. The three-month rate slid 12 bp to 4.64 percent.

    The Libor-OIS spread fell 15 basis points to 339 basis points.

  5. David L. Spurr

    Markets are really just about supply and demand. If there are more buyers than sellers then the markets will go up and vice versa. Markets are emotional and tend to overextend on the upside and downside. This rally will eventually run out of gas and at some point we’ll all have to look at the government and say…”What on earth have we done to the system that used to exist.” I agree with one of the previouse comments that most of the numbers that we’ve been used to looking at to compare are now out the window. They have no bearing on this new type of socialistic capitalism.

  6. Anonymous

    3 Month Sterling libor 6.24 compared to 6.26 yesterday

    3 month dollar libor 4.63 compared to 4.75 yesterday

    3 month euro libor 5.22 compared to 5.29 yesterday

    These don’t look like impressive movements to me especially since considering all the bailouts , guarantees and unlimited dollar funding for europe. I am still not convinced interbank lending is constrained by fear and suspect a constricted funding source may be responsible.

    The flight to treasuries could be draining the banks money sources. Short term US treasuries show yield changes in direct contrast to those for other countries. 6 month US treasuries would appear to have rising yields and prices. Credit markets though are likely to be the final judges.

  7. Anonymous

    Confidence has been lost by bankers, consumers and business people. The benchmark interest rate spreads are a measure of confidence.

    How does nationalizing the banking system, creating an endless supply of dollars, saying ‘disregard the current account deficit and enormous budget deficits’ engender confidence?

    People will need a few days to figure out that the measures taken were nothing but a transfer of wealth from taxpayers to central banks in order to recapitalize a banking system that was not being used and must shrink going forward. We, as taxpayers, have recapitalized the big banks so they can loan us our money and charge us interest for it…Or, we can be frugal and tell them to stick it. Our kids and grandkids can pay for our recapitalization generosity.

    Watch the treasury issues, do not be distracted by a disconnected, highly manipulated stock market…which is akin to the hand that the magician wants one to watch.

  8. Anonymous

    From Bloomberg:
    “No Dilution
    The government will obtain its stakes with a type of security designed not to dilute the value of common shares.”

    Why NOT dilution? There should be dilution. There was gross negligence, massive hubris, and possibly malfeasance to the tune of hundreds of billions, probably trillions of dollars that is so bad it has nearly caused systemic collapse worldwide, and yet the shareholders are being protected from dilution? What? Why?
    What ever happened to the concept of individual personal responsibility? From the corporate officers to the directors to the corporate risk control, to internal and external auditors, to outside analysts and finally to common shareholders everyone failed to exercise prudence and oversight and all should be faced with the inevitable result that when you leverage 20 and 30 and more to one, and then lose multi-billions of dollars, your share price is and should be at risk also.

  9. W.C. Varones

    Taxpayers get hosed again:

    Warren Buffett got 10% perpetual preferred, plus tremendously valuable warrants, for investing in the cream of the crop, GE and Goldman Sachs. The taxpayers are getting 5% and only token warrants for investing in the stinkier banks. That’s a direct transfer of wealth from current and future taxpayers to Wall Street fatcats.

    I suggested last week that the Paulson should lock in today’s ultra-low interest rates on the liability side of the balance sheet by doing a massive 30-year Treasury auction. What he’s doing now is the opposite: locking in ultra-low rates on the asset side of the balance sheet. Yes, the rate purportedly rises to 9% after five years, but that still may not be enough to compensate for one or two bank failures and/or long-run inflation. And can anyone doubt that the 9% rate will be renegotiated when the banks cry poverty and donate to Chris Dodd and Barney Frank’s campaigns? Locking in low rates on assets takes inflation off the table and leaves default as the only solution to unsustainable government debt. Now, $250 billion of low-rate assets isn’t enough to do it, but I suspect this is only the beginning.

  10. Anonymous

    Isn’t the high LIBOR rate simply the crowding-out effect of being able to borrow so inexpensively at the various central bank windows?

    If central banks began to slowly reduce the supply or preferably raise the cost of these facilities, it would put pressure banks to lend to one another, where there is no pressure at all at the moment, yes?

  11. Matt Dubuque

    Matt Dubuque

    As previously recommended, the central banks need to coordinate the simultaneous SALE of short-term securities and the PURCHASE of longer-term securities, a variation of what was known as “Operation Twist” during the Kennedy Administration.

    This will lengthen the time horizon of market participants, which is what we need.

    Matt Dubuque

  12. fred55


    Fred here. Whether or not this is dilutive per GAAP is not the issue. It is not only ACCRETIVE per reality, it’s a free gift of over $100B that could quite readily at least in non-GAAP (OCBOA) be put on the balance sheet as paid-in surplus.


    PLEASE do the math. If the warrants are truly worth what they are represented to be (15% of principal) then the amount invested as preferred is 90% of nominal.

    If $25B of preferred goes into B then really $21.25B is allocable to the preferred.

    That means the 5% accreting to 9% should be measured relative to the 85% notional principal allocated.

    For the first years when its below 9%, we can ROUGHLY assume the deficit interest below 9% compensates for the net present value of the warrant (close enough).

    So for arithmetic purposes, this is a perpetuity at 9%.

    It is worth more or less than its face value depending whether the applicable discount rate for very long term investments of equivalent risk profile is less or more than 9%.

    Right now, arguably, said discount rate is about 15%? Anybody? I assume we’d have to use something around B or CCC.

    Thus we wuz robbed. We’re putting in $X and getting back paper worth maybe 1/2 $X.

    BUT, if you believe that TOO BIG TO FAIL was always and will always be baked in the cake, you might use a different discount rate.

    For me, given what Buffett got and given the realities, this is a free contribution amounting to almost 1/2 of 85% of $250B.

    Incidentally, we were taught this math in 6th grade public schools when schools were schools:

    Value of a perpetuity:

    Present Value = Annual Pmt / Discount

    Therefore, 9% perpetual paper is worth aobut 9/15 of its present value, said present value being whatever the warrants arent worth (I believe 85%?).

    So we just gave away 6/15 or more of 85% of $250B.

    As in GAVE IT AWAY.

    VERY SERIOUSLY, I am a quantitative tax lawyer I specialize in this stuff including valuations of private placement securities and I guarantee you this is how the govt would value these investments at least for federal income tax purposes: if its preferred and not debt and its a near-bk business then you better believe you’d be required to presume a 15% comparable return.

  13. FairEconomist

    Yves, did you see the LIBOR summary pdf posted by “Conjure” on CR? I know the provenance is a bit, um, odd, but the points are very good. The point (on the last page; there’s a lot of background) is that since the banks aren’t borrowing from each other, and have no need to due to the volume of central bank overnight auction, they are free to make up a LIBOR number of whatever they want for whatever benefits they may get from the value of LIBOR. A high LIBOR lets them extract further concessions from the central banks, and also increases the income from their considerable LIBOR-linked loans.

    The real takehome is that LIBOR currently reflects the wishes of the setting banks and not any actual market conditions. So no intervention into the credit markets will have any logical effect on LIBOR.

  14. Anonymous

    In the news: “From the credit desk, we see the guarantee programs as a transformative event that has financials as the new sovereigns, and the sovereigns as the new monolines,” said Brett Williams, credit analyst with BNP Paribas.

    “Our argument is simply that as credit risks are transferred from the banks to the sovereigns, so too should the spread risk premia,” Williams added.

    Analysts said corporates would be ignored in the initial stage of the rally and these credits would attract buying only if the recovery was a sustained one.

    “I don’t think we are out of the woods yet. At this point I would sink my teeth into sovereigns and banks which would be supported by the government. I would not look at corporates,” said a Singapore-based credit analyst.”

  15. Anonymous

    So we’ve given the banks capital with very little strings attached. We’ve told them to engage in mitigation strategies (forestalling foreclosure) that may just make the losses worse. We’ve not plugged the holes in these companies such as excessive spending, excessive executive compensation, and excessive risk taking (in fact, it could be argued that by doing nothing about these, we have encouraged them by adding more capital). So, as I feared, we are continuing to do what we’ve done for the last 15 months since this crunch first went mainstream, that is, exacerbate the problem because those in charge (the well connected) just want one more roll of the roulette wheel to get back on their feet. I hope I’m wrong, but this probably won’t end well, and we’ve gone from a high probability of a serious recession to a high probability of a tremendous meltdown and dislocation. Like Yves, I fear for those on fixed income.

  16. doc holiday

    This soap opera has ended with zero regulation changes and nothing to stop unregulated rating agencies from giving AAA ratings to newly packaged unregulated CDOs, CDSs, SIVs and whatever FASB vehicle entity that needs to be backed or linked to unregulated synthetic Playstation betting. The concept of allowing these attention deficit zombies to continue running wild — is what I get out of this story — not to mention that in this new game upgrade, taxpayers pay for everything, and the sky is the limit!

  17. Chris

    So governments agree to guarantee new loans, on various terms and conditions.

    Anyone got any ideas what’s going to happen to the old, un-guaranteed loans? Is that collection going to be divided into a part which is good enough in quality to be bought by guaranteed new loans, and a part which isn’t?

    Maybe we’re not so far from RFC Take II, or the FDR Home Loan deal. As stuff with value gets picked off by those qualified for guaranteed new funds, it will be possible to distinguish what might have some future value from what has neither present nor future value.

    There’s probably a name for such a process. It would have an interesting effect on derivative markets, especially interest rate swaps and stuff.

    There does seem to be an international conference in the works perhaps like the one Munger mentions.

  18. Anonymous
    If you have not read this please do so.

    Warnings signs:
    No major move after major liquity.
    The up in the market may be a short term thing cause the bond markets where not trading yesterday.
    Look at what Japan did on captial injection, nothing, What do they know after 10+ years of problems that we dont.
    More cash solves nothing.
    Making easier to borrow from the goverment cause others not to lend and hoard cash.

  19. Anonymous

    I know my company is upside down on a LIBOR indexed interest rate swap right now…

    we’re paying out money to the counterparty bank each month…

  20. Flow5

    By both promulgating excessive money and credit creation and avoiding statutory reserve requirements, E-D banks (foreign dollar market) are able to preserve their competitive advantages with lower interest rate loans.

    The volume of prudential reserves held by each E-D bank presumably is dictated by “prudence” – not by any legal requirement administered by a monetary authority.

    All prudential reserve banking systems have heretofore “come a cropper”. Money creation by private profit institutions is not self-regulatory- the “unseen hand” simply does not function in this area.

    Invariably the systems created too much money, speculation became rampant, inflation distorted and destroyed economic relationships, confidence that the banks could meet their convertibility obligations eroded, “runs” on the banks caused mass banking failures, and entire economies were left in ruin.

    To borrow here or abroad? The lending capacity of the member commercial banks in the U.S. is predicated on monetary policy, not the E-D market.

    The Federal Reserve offsets or “sterilizes” any undesired change in U.S. bank reserves stemming from changes inconsistent with domestic policy objectives.

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