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Money-Market Rates Jump as Bank Rescues Stoke Lending Concern

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Gavin Finch and Lukanyo Mnyanda
Monday, Sept 29, 2008

The cost of borrowing in euros for three months rose to a record after government-led bailouts of banks heightened concern that more in Europe will fail, prompting financial institutions to hoard cash.

The London interbank offered rate, or Libor, that banks charge each other for such loans climbed 8 basis points to 5.22 percent today, the largest jump since June, the British Bankers’ Association said. The dollar rate increased 12 basis points to 3.88 percent, the highest level since Jan. 18. The Libor-OIS spread, a gauge of the scarcity of cash, rose to a record.

Money-market rates climbed even after U.S. lawmakers agreed on a $700 billion plan to remove tainted assets from the balance sheets of financial institutions. In Europe, four banks required state assistance and the ECB made additional emergency funds available to lenders through year-end.

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“The root of the banking story is in the money markets, which are still in awful shape,” said Padhraic Garvey, the Amsterdam-based head of investment-grade debt strategy at ING Bank NV. “Banks are dealing with central banks for liquidity purposes, but are very careful about dealing with one another in this environment, which effectively means that the interbank wholesale-money market is not working.”

The U.K. Treasury seized Bradford & Bingley, Britain’s biggest lender to landlords, while governments in Belgium, the Netherlands and Luxembourg extended an 11.2 billion-euro ($16.3 billion) lifeline to Fortis, Belgium’s largest financial- services firm. Hypo Real Estate Holding AG, Germany’s second- biggest commercial-property lender, received a 35 billion-euro loan guarantee from the state, and Iceland agreed to buy 75 percent of Glitnir Bank hf, the nation’s third-largest lender.

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This article was posted: Monday, September 29, 2008 at 12:01 pm

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