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Improvement in Libor Overstates Credit Market Recovery

Although Asian markets opened up nicely on the Obama victory, Europe is focusing on credit market woes, and US futures are down at this hour. From Bloomberg:

Credit markets are still creaking even after the biggest decline on record in the rate banks say they charge each other to borrow dollars.

The London interbank offered rate, or Libor, for three- month loans fell to 2.71 percent yesterday, from 4.82 percent on Oct. 10. The rate is still 171 basis points more than the Federal Reserve’s target interest rate for overnight bank loans, compared with an average of 22 basis points in the five years before the global credit crisis began in August 2007.

“Banks are cutting back, the economy is in a deepening recession and in that environment, I don’t think banks are going to become a lot more willing to extend credit soon,” said Jan Hatzius, chief U.S. economist in New York at Goldman Sachs Group Inc., the world’s biggest securities firm.

Government bailouts totaling about $3 trillion, interest- rate cuts around the world and unprecedented cash injections by central banks drove Libor, the benchmark for $360 trillion of securities worldwide, lower in the past month without convincing financial institutions to lend. About 85 percent of U.S. banks tightened lending standards on loans to large and mid-size companies in the past three months, the Fed said on Nov. 3, the highest since the survey began in its current format in 1991.

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said yesterday conditions remain “highly challenging.” Mike DiGiovanni, General Motors Corp.’s chief sales analyst, said a day earlier the scarcity of lending led to the automaker’s worst month since World War II. The U.S. economy, which contracted 0.3 percent in the third quarter, may stay in a slump through 2009, Fed Bank of Dallas President Richard Fisher said Nov. 3…

The difference between Libor and the overnight indexed swap rate, a measure former Fed Chairman Alan Greenspan uses to gauge the state of money markets, was at 210 basis points yesterday. That compares with 87 basis points on the last day before Lehman’s collapse and an average 11 basis points in the five years before the crisis started.

“We’re not out of the woods yet,” said Jan Misch, a money-market trader in Stuttgart at Landesbank Baden- Wuerttemberg, Germany’s biggest state-owned lender. “Libor fixings are improving but it’s too early to say that this pattern is being replicated in the actual money markets.”…

“The Fed is trying to give Novocain to the markets,” said Peter Boockvar, an equity strategist at Miller Tabak & Co. in New York. “It’s all about buying time.”…

Cash injections have had a limited impact because instead of lending the extra money received in auctions, some financial institutions are holding it on deposit with central banks. Banks lodged a record 280 billion euros ($355 billion) overnight with the ECB on Nov. 3. The daily average in the first eight months of the year was 427 million euros….

In its quarterly Senior Loan Officer Survey, the Fed said about 95 percent of U.S. banks raised the costs on credit lines to large firms, and “nearly all banks” increased the spread on borrowing rates over the cost of funds on loans to firms from July. About 70 percent of U.S. banks indicated they tightened standards on prime mortgage loans…

In another sign that lending remains restricted, corporate bond sales in Europe dropped in October to the lowest level this year, with 25.4 billion euros ($32.3 billion) of notes sold, compared with 35.9 billion euros in September, according to data compiled by Bloomberg. U.S. investment-grade offerings fell to $21.6 billion, the least since July 2002.

“No one wants to lend because they are still wary of values of bank balance sheets, and no one wants to borrow from the money market because they can borrow directly from the central banks,” said Alessandro Tentori, a fixed-income strategist at BNP Paribas SA in London. “In effect, the measures taken by central banks are not providing incentives to go into the interbank market.”

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7 comments

  1. thomas j

    How could anyone possibly believe that monetary authorities acting to artificially suppress Libor rates and, thereby, lower the end rates that lenders can ultimately charge borrowers will actually lead to more lending?

    The more rates go down the less incentive lenders have to lend money to increasingly uncreditworthy borrowers because lenders are not being adequately compensated for the risks they are taking on with artificially suppressed rates in the current deflationary environment. The central banks apparently won’t be satisfied until they are the only banks willing to lend out money.

    You’d think these guys would have learned their lesson by now.

  2. Anonymous

    As the treasurer for a large CRE company, I can make it very simple. My banking contacts, including those at JPM and elsewhere, state that the lack of lending is just as much about credit risk. They are just see a dearth of lending opportunities out there where they are comfortable underwriting the risk. And it is also important to note that while my little corner of the world is CRE, the comments I am hearing are macro in scope.

    So right now, while all the focus is on central bank, interbank and money market lending and credit measures–all of which might be the “heart” of the system, one can’t focus, that while the heart has now been defibrillated, blood is not flowing to the extremities. There has been zero improvement in “main street” lending.

  3. Avl Guy

    I hate to be too glib but I must paraphrase an endearing comment from the 1992 elections:
    “It’s the (un)creditworthiness, Stupid!”

    I know many non-biz journalists have been re-assigned to write on the Debt Unwind crisis, but how do you write about lending contraction and not raise the issue of creditworthiness? How do you assemble so many quotes and stats on declining economic prospects and not tie it to over-capacity and over-supply which diminishes the viability of new deals? How do you not tie it to over-leveraged and weakened borrowers with deteriorating creditworthiness?
    How?
    It’s not just this piece; these creditworthiness oversights have been rampant in biz journalism since September when Paulson/Bernanke concocted that plan to buy troubled assets.

  4. doc holiday

    Re: .. Government bailouts totaling about $3 trillion, interest- rate cuts around the world …

    I'll repeat my earlier post: Through the first 10 months of 2008, world markets have lost about $16.22 trillion, according to S&P research. Furthermore, the size of the world stock market was estimated at about $60.9 trillion USD at the end of 2007, thus the loss of almost a third of global sharevalue is a wakeup call for global financial systemic failure.

    > The "bailout" is not in proportion to the problem and the overhang of derivatives is like a tsunami of expensive and difficult debt that will wipe out many countries. Perhaps The Obama folks will shut down the Chicago derivative casino — but I doubt it and unfortunately, the derivative casino may shut down Obama and America. I'd like to be wrong on that!

  5. Anonymous

    A healthy economy has healthy looking credit markets. The PTB have taken this little fact and turned it on its head. They are hell bent to create the “numbers” that would indicate a healty credit markets- a lower libor, lower spreads, etc.

    They are attempting to reverse engineer a healthy credit market by controlling the indicators- totally absurd!

  6. Anonymous

    What are they buying time for and until you might ask with this Novocain to the markets? The reality seems to be that the bastards are mainlining the money straight into their personal bank accounts.

    Where is the trust that the financial system is suppose to be based on? Has it sunk in yet how gamed the system is? Enrichment of the elites and theocratic fascism for a political scheme.

    This is America? Obama is going to do what?

  7. Anonymous

    Ummm we stand here at the crossroads, which path will we take and can we see all the paths out of these dark woods? I personally don’t think the market will survive in its currant format as its likened to a computer with out firewalls and on a global scale. Do we really want the system to survive in its currant state? I fear an Easter Island event down the road (20 to 50 years) the way things are going. As you can tell I’m a fan of Jarred Diamond’s works, hope he’s wrong!

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