UPDATE 2-Money mkt crisis deepens; dlr spreads hits record
(Recasts, adds Libor fixing, comment, quote)
LONDON, Sept 25 (Reuters) - The crisis engulfing money markets deepened on Thursday, with key measures of dollar funding strains hitting record levels as nervous market participants awaited developments from Washington on a $700 billion U.S. financial bailout plan.
The bank-to-bank premium for borrowing three-month dollars over anticipated official policy rates or Overnight Index Swaps, known as the Libor/OIS spread, blew out to 200 basis points, while the cost of borrowing euros and sterling also jumped.
That dollar Libor/OIS spread was around 164 basis points on Wednesday, and around 80 basis points at the start of September.
Other measures of stress in the banking system, such as the premium paid for three-month eurodollar deposits over Treasury bill yields, known as the TED spread, were also near historic highs.
These developments reflect the extent to which banks are hoarding cash and are loath to lend, as they await a resolution from the U.S. Congress on Treasury's proposals to take troubled assets off banks' books.
This is seen as critical to restore confidence between banks in each others' solvency and to encourage them to resume lending to each other.
"These Libor fixings (and spreads) are all a bit artificial - they could be 200 basis points, 150 or 225 basis points -- no one is trading anyway," said Peter Schaffrik, rates strategist at Dresdner Kleinwort.
"But the fact they (spreads) are widening is reflective of the stress that's under way. There's literally nothing beyond overnight that's trading," he said, noting that the paralysis is being exacerbated by the looming turn of the third quarter and with benchmark three-month funds maturing and needing refinancing in Christmas week.
On top of the three-month Libor/OIS spread hitting 200 basis points on Thursday, the spread of three-month dollar Libor over three-month Treasury bill yields rose to around 325 basis points, tripling since the start of the month.
The closely-watched TED spread, meanwhile, was last indicated around 430 basis points on Reuters screens, edging back up toward the near 500 basis points struck last week, the widest in over a quarter of a century.
The three-month sterling Libor/OIS spread, meanwhile, widened to almost 160 basis points, more than doubling since the start of the month.
These spreads are seen as a key indicator of financial market stress and risk aversion, reflecting the true cost of funding for banks and financial instututions. Some 60 percent of corporate lending is tied to London interbank offered rates (Libor), according to Credit Suisse.
For more on Thursdayu's Libor fixings from the British Bankers Association, see [ID:nLP648832].
IMPLEMENTATION RISK?
News filtering out from Washington on Thursday suggested Congress is close to signing up to the Treasury's $700 billion proposal, or at least a version of it.
The plan's details remain sketchy and last-minute political wrangling over the size, terms and reach of the bill is intense. For the latest on the bailout, see [ID:nWEN8475] and [ID:nN13574113].
Analysts said the absence of interbank lending activity makes it difficult to assess the accuracy of funding rates posted by banks and there has also seen big discrepancies between reported costs of funds and daily Libor fixings.
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.
"European banks don't want to borrow or lend from each other," Bank for International Settlements chief economist Stephen Cecchetti told Reuters late on Wednesday.
"The people who are left with extra would rather deposit it than lend it out, and the people who are short can't borrow."
Overnight money market rates have started to recede toward official target levels amid a flood of liquidity pumped into the banking system by central banks around the world.
But over the last week in Europe, banks have been making heavier use than usual of the European Central Bank's overnight deposit and lending facilities rather than circulating cash around markets.
Euro-zone banks deposited just over 3 billion euros at the ECB overnight on Wednesday rather than lending it on the wholesale money market. On Monday, the figure was 5.965 billion.
Banks are also borrowing from the ECB's overnight loan facility, which attracts a punitive 5.25 percent interest rate, although lending dropped below 1 billion euros on Wednesday for the first time in a week.
Benchmark one-week, three-month and six-month euro rates all continued to rise on Thursday despite ECB liquidity efforts.
Key three-month Euribor rate EURIBOR3MD= jumped to a new near eight-year high of 5.119 percent from Wednesday's level of 5.066 percent.
The one-week equivalent EURIBORSWD= increased to a seven-year high of 4.779 percent from 4.741 percent, while the six-month rate, which crucially covers the period over the end of the year, again hit a record of 5.296 percent.
