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By Gavin Finch and David Yong
     Sept. 30 (Bloomberg) -- The cost of borrowing in dollars overnight surged the most on record after the U.S. Congress rejected a $700 billion bank rescue plan, heightening concern more institutions will fail.
     The London interbank offered rate, or Libor, that banks charge each other for such loans climbed 431 basis points to an all-time high of 6.88 percent today, the British Bankers'
Association said. The euro interbank offered rate, or Euribor, for one-month loans climbed to record 5.05 percent, the European Banking Federation said. The Libor-OIS spread, a gauge of the scarcity of cash, advanced to a record. Rates in Asia also rose.
     ``The money markets have completely broken down, with no trading taking place at all,'' said Christoph Rieger, a fixed- income strategist at Dresdner Kleinwort in Frankfurt. ``There is no market any more. Central banks are the only providers of cash to the market, no-one else is lending.''     Credit markets have seized up, tipping banks toward insolvency and forcing U.S. and European governments to rescue five banks in the past two days, including Dexia SA, the world's biggest lender to local governments, and Wachovia Corp. Money- market rates climbed even after the Federal Reserve yesterday more than doubled the size of its dollar-swap line with foreign central banks to $620 billion. Banks borrowed dollars from the ECB at almost six times the Fed's benchmark interest rate today.

                           Libor-OIS Spread

     The Libor-OIS spread, the difference between the three- month dollar rate and the overnight indexed swap rate, widened to 246 basis points, showing cash scarcity is at a record.
     The difference between what banks and the U.S. Treasury pay to borrow money for three months, the so-called TED spread, was at 338 basis points today after breaching 350 basis points for the first time yesterday. The spread was at 110 basis points a month ago.
     ``We can be sure that funding pressures are not going to ease while there is so much uncertainty,'' said Adam Carr, senior economist in Sydney at ICAP Australia Ltd., part of the world's largest inter-bank broker. ``Cash is going to be at a premium. There's really no end in sight.''



Science without religion is lame, religion without science is blind...Albert Einstein
by vbo on Tue Sep 30th, 2008 at 08:15:04 PM EST
[ Parent ]
This means that the bailouts and nationalizations of individual banks are doing nothing to solve the fundamental problem of the credit markets. I doubt that the $700 billion gift will help any better, give nthat most everybody knows that the (leveraged) holes are bigger than that.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Oct 1st, 2008 at 06:47:48 AM EST
[ Parent ]
Things are now officially totally dysfunctional:


Banks park money in European central banks

The collapse of trust in money markets has led to more than €100bn being parked overnight at the European Central Bank - by far the highest amount ever, underscoring the extent of stress in the global financial system.

Banks are increasingly dealing with central banks rather than each other as the crisis of confidence persists, but central banks around the world are finding it difficult to judge demand for funds as every bank's needs are different.

The volatility in wholesale money markets was underscored on Wednesday with big reductions in overnight unsecured interest rates, but rises in the costs of three-month money.

On Wednesday the Libor rate for overnight US dollar borrowing was fixed at 3.79 per cent, a plunge from 6.87 per cent on Tuesday with a similarly large fall seen in sterling overnight interest rates. But if any banks are able to borrowing in dollars, euros and sterling for three months, the interest rates on these deals got more expensive - up to 4.15 per cent in the US, 5.28 per cent in the eurozone and 6.31 per cent in the UK.

The €102.8bn left on Tuesday night in the ECB's deposit facility, which pays a below-market interest rate of 3.25 per cent, highlighted banks' reluctance to deal with each other. The sum was more than double the amount deposited on Monday night.

At the same time, other banks borrowed almost €16bn from the central bank's marginal lending facility, which incurs a penalty interest rate of 5.25 per cent.

(...)

In a sign of the difficulties of working out how much money to pump into the banking systems, the UK central bank offered two US dollar auctions on Wednesday morning, one overnight and one for a week, but found demand thin for both. Less than half the money offered was taken up in the $30bn weekly auction.



In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Oct 1st, 2008 at 08:17:24 AM EST
[ Parent ]
Why isn't the ECB simply lowering the interst rate it pays out? That would make it more attractive for banks, to lend to each other.

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers
by Martin (weiser.mensch(at)googlemail.com) on Wed Oct 1st, 2008 at 11:34:22 AM EST
[ Parent ]

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