Europe Economy

No End in Sight for Credit Crunch: Central Banks


Top central bankers warned on Wednesday there was no end in sight yet to the global credit crunch as German banking giant Deutsche said the crisis threatened its profit target for this year.

European Central Bank President Jean-Claude Trichet said the turbulence that has gripped financial markets since last summer would probably endure until the U.S. housing market perked up.

"Until conditions in the U.S. housing markets show signs of improvements, the possibility of continuing tensions in structured credit markets cannot be excluded," Trichet told a European Parliament committee.

"Large euro area banks are likely to face pressure on their revenues on account of lower activity levels in the structured credit markets as well as from a general retrenchment from risk-taking across business lines," he said.

Europe has not escaped the credit crunch which first bit in August when banks worldwide clammed up on lending to each other as it dawned on them that they did not know which was dangerously exposed to the U.S. subprime mortgage meltdown.

Securities based on home loans granted to Americans ill-equipped to pay them back have caused banks to write off hundreds of billions of dollars, with more expected to come, and pushed U.S. investment bank Bear Stearns to the brink of collapse.

Until interbank confidence returns, the crisis will continue, experts say.

Deutsche Bank said the asset writedowns and disruption to revenues stemming from global credit turmoil could put at risk its profit goal for this year of 8.4 billion euros.

In its annual report, the bank highlighted the hurdles it faces this year from disruptions in the markets for leveraged finance and structured credit, previously big money spinners that have ground to a halt as credit market turmoil spread.

"The tone this morning is noticeably more bearish and indeed Deutsche has effectively given a (very lightly veiled) profit warning for 2008 on further fair value writedowns," RBS credit analysts said in a note to clients.

Money market rates showed a marked reluctance to lend between banks despite periodic injections of massive liquidity by the world's major central banks.

The interbank cost of borrowing three-month money rose again on Wednesday. Rates for three-month sterling edged up for the 12th session in a row to 6.00 percent, their highest since late December, while three-month euro Libor rates rose to 4.72063 percent, their highest level this year.

Gloomy King

Bank of England Governor Mervyn King was as downbeat as Trichet, saying the credit crunch had entered a new phase.

"The financial crisis has moved into a new and difficult phase. Across the world, confidence in financial markets is fragile," King told a parliamentary committee.

Despite apocalyptic warnings of a new "Great Depression," some confidence has returned on the back of sharp U.S. Federal Reserve rate cuts, its and other central banks' efforts to prime money markets with as much liquidity as required and the orchestration of a takeover of Bear Stearns.

Solid results last week from the likes of Goldman Sachs and Lehman Brothers also helped.

But economic data continues to paint a mixed picture -- U.S. home sales rose for the first time in seven months in February but home prices tumbled 3.0 percent year-on-year in January.

In Europe, the picture seems brighter.

Corporate morale in Germany posted a surprise rise in March to its highest level in seven months, the Ifo research institute's monthly poll of around 7,000 firms showed on Wednesday, while French business sentiment also rose unexpectedly, reaching its highest level so far this year.

The ECB has not followed the Fed's lead in lowering official interest rates and the Bank of England has also proved more reluctant to ease policy.

King said the BoE stood ready to provide liquidity to financial markets as needed and was working with the commercial banks to seek a resolution to the crisis.

But such a solution, he said, should be paid for by shareholders in the banks which took risks, rather than taxpayers.

At a meeting last week, Britain's top bankers urged the Bank of England to be more generous and flexible to ease tensions in fragile money markets.

King said on Wednesday the BoE should not follow the Fed's example with big interest rate cuts and said central banks were taking similar action to ease lending conditions by providing additional funds as required.