SYDNEY Global credit strains took a heavy toll
on Australian money markets on Monday, driving interbank rates
to their highest in 13 years as banks hoarded cash even as
desperate borrowers scrambled for more funds.
The credit stress spilled over from the United States last
week where the Federal Reserve was forced to promise billions
of extra dollars to ease a logjam in the markets which had seen
intense pressure on some hedge funds and mortgage lenders.
"The economic downside has increased quite a bit," said
Peter Jolly, head of research at National Australia Bank. "The
credit markets seem to be telling us that not all is well in
the economy and the financial system."
On Monday, Carlyle Capital Corp CARC.AS, an affiliate of
private equity firm Carlyle Group CYL.UL, said it was still
in talks with lenders on funding its $21.7 billion bond
Last week the bond fund said its banks had made margin
calls it could not meet and warned of a cash shortage.
In Australia, the strains were showing in the interbank
market where banks were hoarding cash, driving three-month bank
bill futures as high as 8.15 percent. That was up from 8
percent on Friday and almost 90 basis points higher than the
central bank's overnight cash rate of 7.25 percent.
In Japan, JGB futures vaulted to a 2-1/2-year high, with
traders saying hedge funds were getting caught on the jump in
London Inter-bank Offered Rate (LIBOR).
Yen LIBOR was set at 0.9875 percent on Friday, jumping back
to the highest since mid-December when money markets around the
world seized up as banks hoarded cash on their balance sheets
before closing books on the year.
The jump in Australian bill rates came even as three-year
and 10-year government bonds rallied after investors sought
refuge in less riskier sovereign debt, spooked by gloomy U.S.
jobs data which stoked fears of a recession in the world's
"The fact that government bond yields are falling and the
bank bill rates are rising shows the extent of funding pressure
existent at the shorter end," said Rory Robertson, interest
rate strategist at Macquarie Bank.
"Funding pressures have become intense and the news is
getting even worse since it started last August."
TIGHT FINANCIAL CONDITIONS
On Friday, the Federal Reserve unveiled new measures
injecting $200 billion into the banking system and said it was
in close consultation with counterparts at other central banks.
The Reserve Bank of Australia (RBA) last year injected
generous amounts of cash into the banking system, but has been
more frugal since. In its daily operation on Monday, it added
just about A$150 million ($138.75 million) more than the
banking system's requirement of A$1.05 billion.
Last week the RBA raised official rates to a 12-year high
to contain domestic inflation.
The central bank has left the door open for more hikes, but
noted that past rate hikes coupled with rising borrowing costs
from the global credit crunch had led to a substantial
tightening in financial conditions.
Commercial banks have responded to the funding pressure by
raising their mortgage and corporate lending rates by more than
the increase in the official cash rate.
Commonwealth Bank of Australia Ltd (CBA.AX), the country's
biggest mortgage lender, said on Monday it would raise its
variable home loan rate by 35 basis points -- 10 basis points
higher than the central bank's hike.
Some analysts still think there is a real risk the RBA will
hike again in May after what is expected to be an alarmingly
high inflation report for the first quarter.
But the markets have almost priced out any chance of a
further hike, and are even implying around 23 basis points of
rate cuts by the RBA in the next 12 months.
"I expect the RBA to keep rates on hold in the foreseeable
future as the market is doing some of the tightening that it
would have done," said Macquarie's Robertson.
Analysts say the tightening in lending conditions have led
to a high premium being attached to liquidity and this was
expected to keep term money market rates at elevated levels.
"High money market rates reflect the wider global credit
crunch and also some of Australia's reliance on overseas
markets for funding," said Besa Deda, senior market strategist
at St. George Bank.
"Some companies which used to be able to fund themselves
from international markets, are now having to access locally to
banks for funding since the onset of the global credit crunch."
(Additional reporting by Eric Burroughs in Tokyo)
(Editing by Jonathan Standing)