Shannon D. Harrington and Abigail Moses
May 10, 2010
Europe’s government debt crisis is starting to infect the bank funding system, driving borrowing costs higher from Asia to the U.S. and threatening to slow the global economic recovery.
The interest rate financial companies charge each other for three-month loans in dollars rose to the highest since August, while traders are paying record amounts to hedge against losses in European bank bonds. Yields on corporate debt rose last week by the most relative to government securities since Lehman Brothers Holdings Inc.’s bankruptcy in September 2008, according to Bank of America Merrill Lynch indexes.
European Union policy makers unveiled an unprecedented loan package today worth almost $1 trillion. A statement from the region’s finance ministers highlighted “a risk of contagion which we needed to address.” The European Central Bank will intervene in secondary markets for securities, EU Economic and Monetary Affairs Commissioner Olli Rehn said in Brussels after a 14-hour emergency meeting.
“Whether the markets completely unravel depends on whether politicians can stabilize the peripheral government market,” said James Gledhill, who helps manage about 58 billion pounds ($85 billion) as head of fixed income at Henderson Global Investors Ltd. in London. “The tail risk is the stress on banks which stops them from lending to corporates and feeds through to become a real economy problem.”