Money market rates soar as paralysis deepens

European money-market rates climbed to records as banks baulked at lending amid speculation more financial institutions will collapse.

The euro interbank offered rate, or Euribor, that banks charge each other for three-month loans in the currency increased 1 basis point to an all-time high of 5.39% today, the European Banking Federation said. The two-week rate jumped to a record 5.04%.
 
The European Central Bank offered one-day dollar loans at 9.5% today, 556 basis points higher than yesterday's overnight rate.

``We're clearly in a situation of excess pessimism and it's very difficult to see what can really jolt these markets out of the current malaise,'' said Sean Maloney, a fixed-income strategist in London at Nomura International Plc.

Interbank lending rates have soared as financial institutions store cash to meet anticipated funding needs, defying the efforts of central banks around the world to revive the frozen credit markets. The UK said today it plans to invest about 50 billion pounds ($122 billion) in an unprecedented step to stave off a collapse of the country's banking system.

The London interbank offered rate, or Libor, for overnight loans in dollars surged 157 basis points yesterday to 3.94%, underscoring the difficulty that banks are having in borrowing even for a day. The corresponding rate for euros climbed 22 basis points to 4.49%.

ECB auction

Libor, set by 16 banks in a daily survey by the British Bankers' Association at about noon in London, determines rates on $US360 trillion ($500 trillion) of financial products worldwide, from home loans to derivatives. Member banks provide estimates on how much it would cost to borrow in 10 currencies for periods ranging from a day to a year. Euribor, set in a survey of more than 30 institutions by the European Banking Federation, is published about 90 minutes earlier.

The Frankfurt-based ECB said it loaned banks $US70 billion of one-day loans today, up from $US50 billion yesterday. Banks bid for $US122 billion. The 9.5% marginal rate at which 96% of the funds were borrowed compares with yesterday's Libor of 3.94% and the Federal Reserve's target rate of 2%.

The deepening credit crisis forced the UK to join the US, Ireland, Iceland, Belgium and Spain in rushing out untested bailout measures to save banks. As part of the plan, Prime Minister Gordon Brown's government will buy preference shares, and the Bank of England will make at least 200 billion pounds available for banks to borrow under a so-called special liquidity plan, the Treasury said in a statement today.

Royal Bank of Scotland Group Plc and Barclays Plc said they plan to participate in the government rescue.

Libor-OIS spread

The Libor-OIS spread, a gauge of cash scarcity among banks that measures the difference between the three-month dollar rate and the overnight indexed swap rate, increased to 294 basis points today. It was at 167 basis points two weeks ago and 81 basis points a month ago.

Federal Reserve Chairman Ben S. Bernanke signaled yesterday policy makers are ready to lower interest rates as the credit freeze poses an escalating danger to the economy.

The world financial system is under ``extraordinary stress'' and history shows that severe instability ``can take a heavy toll on the broader economy if left unchecked,'' Bernanke said in a speech in Washington. ``The Fed will need to consider whether the current stance of policy remains appropriate.''

Ted spread

President George W. Bush signed a $US700 billion US bailout bill into law last week to help stem the crisis, which has claimed financial companies including Bear Stearns Cos. and Lehman Brothers Holdings Inc. The legislation enables the government to purchase tainted assets from institutions. European leaders meeting in Paris over the weekend pledged to bail out their own nations' banks, while stopping short of a regional rescue effort.

The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, was at 355 basis points. It reached 393 basis points two days ago, then the most since Bloomberg began compiling the data in 1984.
Writedowns and losses worldwide tied to the US mortgage market have reached $US592 billion since the start of last year, according to data compiled by Bloomberg.

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