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Wednesday, November 28, 2007

The Liquidity Crunch Deepens

This news from reuters doesn't sound too promising, not at all it doesn't!

Money markets tightened further on Wednesday with the cost of borrowing euros in the wholesale interbank market hitting fresh 6-1/2 year highs as banks paid a higher premium for cash covering the New Year period.

Cash is getting less available and more expensive in the market since the credit crunch started in August as banks hoard cash as a contingency against credit-related losses. This general shortage is being exacerbated by liquidity concerns over the seasonally thin Christmas and New Year period.

London interbank offered rates (Libor) -- the benchmark lending rates between banks -- for two-month euros rose to 4.73875 percent at their daily fixing, the highest since May 2001. In early August rates were below 4.2 percent.

Libor rates for two-month dollars rose to a one-month high of 5.08563 percent, while sterling rates for the same period rose to a two-month high of 6.63875 percent.

"The level of confidence remains quite low. Banks are still reluctant to lend because of counterparty risk and balance sheet constraints on their own side," said Nathalie Fillet, senior fixed income strategist at BNP Paribas.

"Until recently, banks have been funding on an overnight basis but have now started to secure funding to cover the year-end. Hence, central banks have no choice but to continue to support and flood the market with liquidity."


And to all this can be added the announcement yesterday from the ECB that they are about to inject a further €30bn ($44.3bn) in one-week funds into the banking sector.

For what it's worth here's the most recent 3 month euro libor chart we have available (the BBA only updates the data with a one week time lag).




Also today we have news that China's CSI 300 Index has followed Japan's Topix into bear market territory, I have a much fuller reflection on what is happening to Japan in the Asian context up on Global Economy Matters.

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