European Money-Market Rate Drops To Lowest Since Lehman Failure

Tuesday, 21 October, 2008

The cost of borrowing in euros for three months fell to the lowest level since Lehman Brothers Holdings Inc. collapsed as governments stepped up efforts to boost bank balance sheets and policy makers offered cash to revive lending.

The euro interbank offered rate, or Euribor, for such loans dropped 3 basis points to 4.97 percent today, the European Banking Federation said. That's the lowest level since Sept. 15, the day Lehman filed for bankruptcy. The comparable London interbank offered rate, or Libor, for dollar loans will decline about 21 basis points to 3.85 percent, according to David Buik, a market analyst in London at interdealer broker BGC Partners Inc.

Recent measures are helping to stabilize the funding situation,'' said Han Sia Yeo, a currency strategist at Bank of America Corp. in Singapore. ``Funding conditions should continue to normalize for now.''

Governments worldwide have introduced a raft of measures to shore up bank balance sheets after money markets seized up following the Lehman failure. The French government will inject 10.5 billion euros ($14 billion) into BNP Paribas SA, Societe General SA and four other domestic banks as they tap for the first time the 360 billion-euro state rescue package unveiled this month.

Rates Falling

Interbank rates have tumbled in the past week after policy makers in Europe offered lenders unlimited dollar funding. The European Central Bank and the Bank of England made available as much of the U.S. currency to banks as required today, the second such operation. The Libor-OIS spread, a measure of cash liquidity, stayed below 300 basis points for a second day.

Treasury three-month bills fell for a fourth day, the longest sequence of declines in 10 weeks, as investor appetite for the safest assets dwindled.

The three-month dollar Libor slid 36 basis points yesterday to 4.06 percent, the biggest drop in nine months, according to the British Bankers' Association. It's still 256 basis points more than the Federal Reserve's key rate of 1.5 percent, up from 120 basis points about a month ago. At the start of the year, the spread was 43 basis points.

``We see a slight improvement on the interbank market, but no breakthrough yet,'' European Central Bank Executive Board member Juergen Stark said in an interview with German radio station Deutschland funk. ``There's a high risk that we'll see another incident'' in the banking sector.

French Funding

The Libor is used to determine rates on $360 trillion of financial products worldwide, from mortgages to company loans and derivatives.

The French government will subscribe to subordinated debt issued by the country's six biggest banks, without acquiring voting rights, Finance Minister Christine Lagarde said at a press conference in Paris yesterday. In exchange, the banks will have to boost lending to companies and households, she said.

The decline in U.S. bills pushed yields to the highest level in almost a month on speculation concerted global action will ease the turmoil in the credit markets. The cost of protecting European and Asian corporate bonds from default dropped as appetite for higher-yielding assets increased.

The ECB is making funds available for 28 days via a currency swap in which it lends dollars against euros. In a separate one- month tender, the Frankfurt-based central bank offered dollars against collateral at a fixed rate of 2.11 percent. In both cases it will fill all bids.

`Plenty of Cash'

``There's plenty of cash on the table and there's plenty of money coming into the banking sector,'' said David Keeble, head of fixed-income strategy in London at Calyon, the investment-banking arm of Credit Agricole SA. ``What we're finding is that confidence has been improving.''

The three-month interbank lending rate for Hong Kong dollars, or Hibor, dropped for a third day, sliding 31 basis points to 3.35 percent, and its longest run of declines in more than a month. Singapore's three-month rate for U.S. dollar loans slid for a sixth day, to 3.92 percent.

Australian banks' borrowing costs climbed for the first time in four days as financial institutions increased deposits at the central bank to a record. The rate banks charge each other for three-month loans rose to 5.87 percent, the highest since Oct. 15. Bank deposits at the Reserve Bank of Australia grew to a record A$11.2 billion ($7.7 billion) yesterday, up by A$306 million.

``The funding situation is still fragile and we've seen evidence of that today,'' said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney.

Source: http://www.bloomberg.com/