Money markets stuck at crisis levels as U.S. plan eyed
LONDON (Reuters) - The estimated cost of borrowing dollars on seized-up interbank markets remained at crisis levels on Thursday, as nervous market participants awaited developments from Washington on a $700 billion U.S. financial bailout plan.
Congress is discussing the Treasury's proposals to take troubled assets off banks' books, a move seen as critical in restoring confidence between banks in each others solvency and in encouraging them to resume lending to each other.
The details of the plan remain sketchy and last-minute political wrangling over the size, terms and reach of the bill is intense.
Market participants report virtually no interbank lending beyond periods of a week or two, a paralysis exacerbated by the looming turn of the third quarter and with benchmark three-month funds maturing and needing refinancing in Christmas week.
"We have been seeing substantial evidence that banks are unwilling to make loans to each other," Bank for International Settlements chief economist Stephen Cecchetti told Reuters late on Wednesday.
"European banks don't want to borrow or lend from each other. The people who are left with extra would rather deposit it than lend it out, and the people who are short can't borrow."
In London trading on Thursday, the interbank cost of borrowing dollars for three months was indicated in a huge range of between 3 and 4.8 percent.
Overnight dollar rates were closer to the U.S. Federal Reserve's 2 percent target rate but still high at between 2 and 2.80 percent, Reuters charts show.
The closely-watched Treasury/Eurodollar (TED) spread, or the difference between these market-based dollar rates and three-month U.S. government borrowing rates, fluctuated in a wide range of around 260 to 420 basis points.
That spread, seen as key indicator of financial market stress and risk aversion, ballooned last week to almost 500 basis points, the widest in over a quarter of a century.
Three-month U.S. T-bill yields hovered around 0.5 percent on Thursday.
Analysts said the absence of interbank lending activity makes it difficult to assess the accuracy of rates posted by banks and there has also seen big discrepancies between reported costs of funds and daily fixings of the London interbank offer rate (Libor), a key reference for financial contracts worldwide.
Some analysts say banks are deliberately overstating London interbank offered rates (Libor) so as not to lend, and some suggest others may be understating Libor rates to help reduce exposure on Libor-related liabilities such as swaps contracts.
The stress is spread well beyond rates for borrowing U.S. dollars, where there has been an acute shortage in Europe and elsewhere due to the scale of banks' dollar liabilities.
The premia paid for three-months in sterling over expected official policy rates has exploded, doubling in recent sessions to a record high of 150 basis points. Continued...
