Credit Crisis Intensifies in Europe, Asia
The latest wave of the seven-month old global credit crisis intensified on Monday as interbank lending rates climbed again in Europe and Asia and the world's top central bankers said they were on high alert.
The U.S. Federal Reserve's decision on Friday to pump an additional $200 billion into the U.S. banking system helped ease the stress in dollar borrowing, but bank-to-bank lending rates in euros climbed to their highest in almost two months.
The rise in euro rates -- the third such wave since last August and a reflection of banks both hoarding cash and being unwilling to lend to each other -- has seen three-month London Interbank Offered Rates jump almost a fifth of a percentage point so far this month.
European Central Bank chief Jean-Claude Trichet, speaking in his capacity as chairman of the Global Economy Meeting of the world's top central bankers, said significant market disruption and volatility were persisting.
"The alertness of central banks was very important, as always but of course also in present circumstances," Trichet told a press briefing after the meeting at the Bank for International Settlements. "We are in close contact."
Signs that strapped banks are cutting back loans everywhere has sent fresh shockwaves through debt markets around the globe this month, as their growing unwillingness to use scarce capital to broker markets has prompted seizures everywhere from U.S. municipal bonds to euro zone government debt.
Credit and bond market liquidity -- the ability to find a tradable price for securities -- is drying up and many mutual bond funds that are facing heavy redemptions are loading up on precautionary cash instead, analysts said.
Banks' rationing of capital -- the result of six months of balance sheet hits from writedowns of U.S. subprime mortgages and related securities -- has also hit their willingness to extend credit to hedge funds.
This, in turn, is triggering a cycle of margin calls and forced selling across many markets, analysts said.
More bank losses during the first quarter -- following fresh turmoil in the likes of leveraged loans, commercial mortgages, municipal bonds -- means banks are again struggling to preserve adequate capital ratios as quarter-end accounting looms.
"The reduction in leverage in the financial system has resulted in forced liquidations into a market with no bid," Bernd Volk, bond analyst at Deutsche Bank in Frankfurt, said in a note to clients on Monday. "Several asset classes witnessed dramatic and extreme price movements."
European credit premia rose again despite a brief respite on the Fed action Friday.
The investment grade Markit itraxx Europe index, which has trebled since the start of the year, rose 5 basis points on Monday to 151 basis point.
While dollar Libor funding rates did ease again on Monday, this was largely as a result of another downward revision to Fed rate cut expectations following news on Friday of the biggest loss of jobs in five-and-half years in February and the Fed's new liquidity injections.
One-month dollar Libor fell almost seven basis points to 2.935 percent.
An emergency Fed rate cut is possible ahead of its next scheduled monetary policy meeting on March 18, according to a Goldman Sachs research note on Monday.
In its Friday and Monday research notes, Goldman said the Fed would drop the benchmark federal funds target rate to 2 percent by late April from the current 3 percent, most likely in two 50 basis-point steps at the next two meetings.
"We cannot rule out an intermeeting rate cut today," the Monday note said.
One of the measures the Fed plans to boost liquidity is upping the amounts it allocates at so-called Term Auctions Facilities -- its way of extending cash advances to the banks without forcing them to use the emergency discount window.
Central banks around the world joined forces in extending these dollar TAFs in December during the last wave of the crisis and the moves were largely responsible for calming tensions around the turn of the year and through January.
But the ECB and others let the facilities lapse on February 1 and said last week they had no plan to resume them.
The credit strains took a heavy toll on Australian money markets earlier on Monday, driving interbank rates there to their highest in 13 years as banks hoarded cash even as desperate borrowers scrambled for more funds.
Japanese yen interbank rates were set at 0.9875 percent on Friday, jumping back to the highest since the global squeeze in mid-December.
Elsewhere on Monday, Carlyle Capital an affiliate of private equity firm Carlyle Group and latest casualty of the crunch, said it was still in talks with lenders on funding its $21.7 billion bond portfolio.
Last week the bond fund said its banks had made margin calls it could not meet and warned of a cash shortage.