Australia, Japan Pump In Cash to Combat Credit Freeze

By David Yong and Garfield Reynolds

Sept. 29 (Bloomberg) -- Japan and Australia's central banks added more than $20 billion to money markets as agreement on a $700 billion plan to revive the U.S. financial system failed to bring down interbank lending rates.

Singapore's benchmark rate for three-month U.S. dollar loans rose one basis point to 3.79 percent, the most in eight months. Australian funding costs held near a six-month high as banks kept a record amount of cash at the central bank. Short- term rates for loans between banks jumped in Hong Kong and Japan as Belgium and the U.K. rescued their biggest lenders.

``When you have a global credit crisis, there's definitely counterparty risk involved in funding activities,'' said Thomas Harr, a senior currency strategist at Standard Chartered Plc in Singapore. ``If the bailout package is approved, it could help the situation somewhat as banks may become less scared of lending to each other.''

Money-market rates are signaling banks' reluctance to lend to each other as U.S. lawmakers may vote on an emergency bill by Oct. 1 to give the Treasury as much as $700 billion to buy tainted mortgage debt from banks to unfreeze credit markets.

Global banks chalked up $555.9 billion of writedowns tied to the collapse of U.S. subprime mortgage market, sending Lehman Brothers Holdings Inc. into the biggest bankruptcy and making Washington Mutual Inc. the largest bank failure in U.S. history. Fortis received a $16.3 billion bailout from the governments of Belgium, Netherlands and Luxembourg and the U.K. government may nationalize mortgage lender Bradford & Bingley Plc.

Singapore's three-month interbank offered rate for U.S. dollars, or Sibor, rose 1 basis point, or 0.01 percentage point 3.79 percent, the highest since Jan. 22, according to the Association of Banks in Singapore. In Hong Kong, the three-monthHibor jumped 9 basis points to 3.49 percent, the Association of Banks in Hong Kong said. The cost reached 3.8 percent on Sept. 25, the most since December 2007.

``Rates may still stay higher than normal because questions remain,'' said Song Seng Wun, an economist at CIMB-GK Securities Ltd. in Singapore. ``It's really now the devil in the details in the bailout package.''

Cash Injection

The Bank of Japan injected 1.9 trillion yen ($17.9 billion) today. It has added about 15 trillion yen to the system the past two weeks, the most in at least six years.

Japan's overnight call loan rate stood at 0.41 percent as of 3:10 p.m. in Tokyo, from 0.525 percent on Sept. 26, according to Tokyo Tanshi Co.

The Reserve Bank of Australia added A$2.72 billion ($2.3 billion) and has pumped in more than A$2 billion a day on average since Sept. 15, more than twice the level for the first half of this year.

In Australia, banks had a record A$10.7 billion sitting in exchange-settlement accounts today at the Reserve Bank of Australia after the cash injection. Those accounts are on-call deposits that earn interest at 0.25 percentage point below the central bank's overnight cash target rate of 7 percent.

``The interbank lending market has pretty much dried up so everyone is holding onto their own money,'' Joshua Williamson, a senior strategist at TD Securities Ltd. in Sydney, said in a telephone interview. ``Australia's banks are taking a wait-and- see approach toward the U.S. bailout.''

Borrowing Costs

Borrowing costs among Australian lenders were little changed today, holding near the highest since Bear Stearns Cos. collapsed six months ago, according to a gauge that measures the availability of funds in the market.

The difference between the rate Australian banks charge each other for three-month loans and the overnight indexed swap rate stood at 90.50 basis points, or 0.9050 percentage point, at 2:12 p.m. in Sydney, from 91 basis points on Sept. 26, when it climbed as high as 98.5 basis points, Bloomberg data show. The gap has averaged 45 basis points this year.

The Reserve Bank sold A$1.55 billion of term deposits, after offering A$2 billion of them, paying 6.95 percent on A$750 million of seven-day deposits and 7.02 percent on A$800 million of 14-day deposits, according to its Web Site.

To contact the reporters on this story: David Yong in Singapore at dyong@bloomberg.net; Garfield Reynolds in Sydney at greynolds1@bloomberg.net