Money-Market Rate Falls on $700 Billion Bad-Debt Plan

By Gavin Finch

Sept. 22 (Bloomberg) -- The cost of borrowing in dollars overnight fell after the U.S. government widened the scope of its $700 billion bank rescue plan in an attempt to shore up the financial system.

The London interbank offered rate, or Libor, for such loans slid 28 basis points to 2.97 percent today, according to the British Bankers' Association. That's 97 basis points higher than the Federal Reserve's target rate, compared with an average 10 basis points during the past seven years.

``This is undoubtedly a step in the right direction but there's still a lot of uncertainty in the system,'' said David Keeble, head of fixed-income strategy in London at Calyon, the investment-banking unit of Credit Agricole SA, France's second- largest bank. ``The money markets got killed last week and will take time to recover.''

The Treasury adjusted its plan to insure money-market funds to limit protection to balances as of Sept. 19, after complaints from bank lobbyists. Officials made the changes two days after unveiling plans to move troubled mortgage-related assets from the balance sheets of American financial companies and putting them in a new institution.

The change will potentially include car loans, credit-card debt and other devalued assets and may force an increase in the size of the $700 billion package as the legislation proceeds through Congress.

Emergency Funds

The Fed, the European Central Bank and the Bank of Japan joined with counterparts in Switzerland, the U.K. and Canada last week to pump hundreds of billions of dollars into the financial system. The ECB, Bank of England and Swiss National Bank lent $76.2 billion in emergency overnight funds today. The funds replace $70.8 billion in overnight loans maturing today.

Borrowing between banks seized up last week, with the overnight rate for dollars doubling to 6.44 percent on Sept. 16, after Lehman Brothers Holdings Inc. collapsed and the U.S. government took over insurer American International Group Inc., heightening concern other financial institutions will fail.

The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, narrowed 5 basis points to 228 basis points today. Last week, it exceeded the 300 basis-point spread reached on Oct. 20, 1987, when stocks collapsed around the world on what became known as Black Monday.

The world's biggest financial institutions posted $521 billion in subprime-related losses and writedowns since the start of last year. Corporate bond sales in Europe dropped to the lowest weekly level in almost six years, while spreads soared to a record over benchmark rates, according to data compiled by Bloomberg.

The cost of borrowing in euros for one week rose today to the highest level since May 2001, according to the European Banking Federation. The euro interbank offered rate, or Euribor, jumped 10 basis points to 4.65 percent. The three-month rate climbed 2 basis points to 5.03 percent, the highest level since November 2000.

To contact the reporter on this story: Gavin Finch in London at gfinch@bloomberg.net