Libor Soars on Concern Bank Bailout Will Be Diluted

By Gavin Finch and David Yong

Sept. 25 (Bloomberg) -- Money-market rates around the world soared on mounting concern the U.S. Treasury's $700 billion bailout plan will be diluted as it makes its way through Congress, causing financial institutions to hoard cash.

The three-month London interbank offered rate, or Libor, that banks charge each other for dollar loans jumped today by the most since 1999 and the euro rate rose to the highest level since November 2000. Rates in Hong Kong and Singapore climbed as Bank of East Asia Ltd. faced a run on deposits. The difference between the three-month dollar rate and the overnight indexed swap rate, the Libor-OIS spread, widened to the most on record.

``Liquidity in the money markets in maturities over a week is desperately scarce,'' said Tim Bond, head of global asset allocation at Barclays Capital in London. ``A near-term solution to the crisis is urgent. Unchecked, the current crisis would turn into a self-reinforcing vortex of defaults, bank capital contraction and deep recession within a matter of weeks.''

Money-market rates signal banks have all but stopped lending to each other. Treasury Secretary Henry Paulson's bailout plan, which proposes removing tainted assets from bank balance sheets, may be cut back in size, U.S. House Budget Committee Chairman John Spratt said today. The U.S. faces a ``painful'' recession if the package isn't approved, President George W. Bush said yesterday.

`Nothing's Working'

The Libor-OIS spread, a measure of the availability of cash among banks, widened 33 basis points to 200 basis points today, the most on record. It averaged 8 basis points in the 12 months to July 31, 2007, before the credit squeeze began.

``The message coming from our money-market traders is that nothing's working,'' said Padhraic Garvey, the Amsterdam-based head of investment-grade debt strategy at ING Bank NV. ``Banks are not dealing with one another and the situation has gotten worse. The real market is probably about 10 to 20 basis points above where Libor fixings are.''

The turmoil in money markets is rippling through the economy. General Electric Co. cut its earnings forecast today and said it will pare back GE Capital's commercial paper to between 10 percent and 15 percent of total debt. Pilgrim's Pride Corp., the biggest U.S. chicken producer, expects to breach one of its credit covenants because it will post a ``significant'' fourth-quarter loss.

Fortis, the financial-services company that set out in June to bolster capital by 8.3 billion euros ($12.2 billion), tumbled as much as 21 percent in Brussels trading, the most since it was formed in 1990, on concern it needs help with funding.

Deposit-Base `Fear'

The drop is ``linked to rumors that every Belgian citizen is frightened by Fortis,'' said Scander Bentchikou, a Paris-based analyst at Oddo Securities. ``Lots of people say they should diversify and fear a drop in the deposit base.''

``We don't have any indication of the withdrawal of customers,'' said Fortis spokeswoman Liliane Tackaert in Brussels.

``Systemic risks are extremely high, and the outlook appears bleak,'' said Laurence Mutkin, the London-based head of European fixed-income strategy at Morgan Stanley. ``Term lending markets appear almost to have closed, while cash hoarding continues.''

The cost of three-month loans in euros climbed 5 basis points to 5.11 percent, the British Bankers' Association said today. The dollar rate rose 29 basis points to 3.77 percent. That's the most compared to the Federal Reserve's target rate on record. Hong Kong's three-month rate rose 13 basis points to 3.80 percent, the highest level since December 2007.

`Stay Calm'

Hong Kong had its first bank run since the Asian financial crisis in 1997 as depositors rushed to withdraw funds from Bank of East Asia. The bank's chairman, David Li, said the lender has ``no problem'' and Joseph Yam, chief executive of Hong Kong's central bank, urged customers to ``stay calm.'' The Hong Kong Monetary Authority injected HK$3.88 billion ($500 million) into the banking system today.

Chinese lenders, including Industrial and Commercial Bank of China, have set tighter standards on credit lines with international finance companies, according to people at the banks' treasury departments who declined to be named. Others like China Citic Bank Corp. imposed tighter limits on interest-rate swaps to avoid losses.

Singapore's three-month dollar loan rate surged 29 basis points to 3.684 percent today, the highest level since Jan. 22, according to the Association of Banks in Singapore. In Australia, the one-month bank bill swap rate, used to determine yields on variable-rate loans, was 7.458 percent, the highest level since Aug. 5, according to data compiled by Bloomberg.

Losses and Writedowns

``The Australian financial system has felt the impact'' of global difficulties, the Reserve Bank of Australia said in its half-yearly Financial Stability Review published today in Sydney. ``The general increase in uncertainty has also meant that most banks are taking a more cautious attitude to lending.''

The nation's banks were holding A$7 billion ($5.9 billion) of on-call deposits with the central bank, the most since at least 2003, according to the Reserve Bank of Australia.

Financial institutions around the world have posted $523 billion in losses and writedowns on assets linked to the collapse of the U.S. subprime-mortgage market since the start of last year.

The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, widened 24 basis points to 326 basis points. That's the most since Bloomberg began compiling the data in 1984. It was 114 basis points a month ago.

To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; David Yong in Singapore at dyong@bloomberg.net