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Money-Market Rates Double Amid Global Credit Seizure

Posted by seumasach on September 16, 2008

Gavin Finch and Kim-Mai Cutler

Sept. 16 (Bloomberg) — The cost of borrowing in dollars overnight more than doubled to the highest since 2001 as the collapse of Lehman Brothers Holdings Inc. and credit downgrades of American International Group Inc. led banks to hoard cash.

The overnight dollar rate soared 3.33 percentage points to 6.44 percent today, its biggest jump in at least seven years, according to the British Bankers’ Association. The rate was as low as 2.07 percent in June.

Banks are driving up short-term lending rates on concern that AIG will follow Lehman into bankruptcy and leave financial institutions with losses on $441 billion of credit derivatives issued by the biggest U.S. insurer. Central banks around the world pumped more than $210 billion into the financial system as they sought to alleviate the credit-market seizure.

“It’s fear, you don’t know who has exposure and who might not be getting their money anymore,” said Imke Jersch, a senior money-market trader in Hanover at Norddeutsche Landesbank Girozentrale AG, Germany’s fourth-biggest state-owned bank. “It’s a domino effect. You never know who might fall next.”

The increase underscores how the credit seizure that started in August 2007 with the collapse of the U.S. subprime- mortgage market is worsening, causing more than a dozen U.S. banks to fail. Money-market costs are used to calculate rates on $360 trillion of financial products worldwide from home loans to credit derivatives.

Treasuries, Stocks

U.S. Treasuries soared, stocks dropped and the cost of default protection on Wall Street banks rose to a record as investors sought the safety of government assets. The yield on the 10-year note dropped to the lowest in five years and the Standard & Poor’s 500 Index lost as much as 1.6 percent. Credit- default swaps on Morgan Stanley, Goldman Sachs Group Inc. and Citigroup Inc. all traded at record highs.

The difference between the London interbank offered rate for three-month dollar loans and the overnight indexed swap rate, the Libor-OIS spread that measures the availability of funds in the market, widened 12 basis points to 117 basis points, the most since at least December 2001. That compares with an average of 8 basis points in the 12 months to July 31, 2007, before the credit squeeze started.

The cost of borrowing euros for one week jumped 7 basis points to 4.49 percent today, the highest level since Dec. 24, according to the European Banking Federation. It was the biggest increase since July 3.

Rate-Cut Bets

The Fed added $50 billion in temporary reserves to the banking system today through overnight repurchase agreements, or repos. The European Central Bank offered 70 billion euros ($100 billion) in a one-day refinancing operation and the Bank of England injected 20 billion pounds ($36 billion). The Bank of Japan added 2.5 trillion yen ($24 billion) and the Reserve Bank of Australia injected A$1.85 billion ($1.5 billion).

Traders raised bets the Fed will cut interest rates at a meeting today. Futures on the Chicago Board of Trade showed a 90 percent chance the central bank will lower its 2 percent target rate by a quarter-percentage point, compared with 68 percent yesterday and no chance a week ago. Policy makers are scheduled to announce their decision at 2:15 p.m. in Washington.

“It’s all a mess out there, it’s unbelievable, it’s very tough,” said Padhraic Garvey, head of investment-grade strategy in Amsterdam at ING Bank NV. “There really is no sign of this going away. If the Fed were to cut rates, it’s not necessarily going to solve anything.”

Writedowns, Losses

Financial institutions have posted more than $514 billion in losses and writedowns since the beginning of last year as the U.S. mortgage crisis deepened. Bank of America Corp., the biggest U.S. consumer bank, agreed to acquire Merrill Lynch & Co. yesterday for about $50 billion.

The seizure in the credit markets and increase in short- term borrowing costs this year triggered doubts over the validity of Libor, which is administered by the London-based British Bankers’ Association.

To contact the reporters on this story: Gavin Finch in London at; Kim-Mai Cutler in London at

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