Business World

Thursday 19 October 2017

Libor up seven points as credit freeze fails to thaw

interbank rates

The cost of borrowing in dollars in London for three months rose as cash injections and interest rate cuts by 10 major central banks failed to thaw a credit freeze that put stocks on course for their worst week in 30 years.

Lending between financial institutions has seized up since the collapse of Lehman Brothers Holdings on September 15, stymieing attempts by governments and central banks to stave off a global recession.

The London interbank offered rate, or Libor, that banks charge each other for such loans climbed seven basis points to 4.82pc, the British Bankers' Association said. Libor sets the rate on $360 trillion of financial products worldwide, from home loans to derivatives.

The rate in Tokyo jumped to the highest since 1998 even as the Bank of Japan added more than €22bn to the banking system. The overnight dollar rate tumbled 262 basis points to 2.47pc.

"Central banks are trying to supply liquidity, and in many cases it just comes back to them," said Robin Marshall, director of international fixed income in London at NCL Smith & Williamson, which oversees about $20bn in assets.

"There's a real problem in getting people to put their money to work. The fear of counterparty risk is so intense that the only bank prepared to lend at the moment is the central bank."

TED spread

The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, was at 457 basis points, the most since Bloomberg began tracking the data in 1984.

"While the authorities across the globe have taken a host of unprecedented measures to shore up confidence, nothing seems to be working," Rajiv Setia and Piyush Goyal, strategists at Barclays Capital Inc in New York, wrote in a report. "Participants are increasingly unwilling to bear counterparty risk with any entity, other than the government, at any price."

The cost of borrowing in dollars in London for three months rose as cash injections and interest-rate cuts by 10 major central banks failed to thaw a credit freeze that put stocks on course for their worst week in 30 years.

Stock exchanges in countries including Russia and Austria delayed the opening of trading yesterday and Indonesia extended a two-day halt as valuations plunged on concern more financial institutions will fail. Iceland yesterday suspended trading until October 13 after the government seized Kaupthing Bank hf, the nation's biggest lender. Banks in South Korea stopped giving credit to importers.

The Bank of Japan added three trillion yen (€22bn) to the banking system and the Reserve Bank of Australia pumped in A$2.63bn (€1.3bn). The European Central Bank yesterday loaned banks $94bn (€55bn) for four days.

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