Money-Market Rate Slides After Central Bank Action

By Gavin Finch and Kim-Mai Cutler

Sept. 18 (Bloomberg) -- The cost of borrowing in dollars overnight tumbled after central banks worldwide pumped $247 billion into money markets.

The three-month rate rose for a third day, to the highest since January, signaling that banks are still wary of more failures among financial institutions after Lehman Brothers Holdings Inc. collapsed and the U.S. government took control of American International Group Inc.

``The only thing you can say about today's intervention is that the overnight rate is now better,'' said Jan Misch, a money-market trader in Stuttgart at Landesbank Baden- Wuerttemberg, Germany's biggest state-owned bank. ``There's still a complete lack of confidence in the market though. There is enough cash out there, it's just not being lent out because people have lost faith in each other.''

The Federal Reserve, the European Central Bank and the Bank of Japan joined with counterparts in Switzerland, the U.K. and Canada to inject cash into the money markets in a coordinated bid to ease the worst financial-market crisis since the 1920s.

The London interbank offered rate, or Libor, for overnight loans fell 1.19 percentage points to 3.84 percent today, according to the British Bankers' Association. It dropped 1.41 percentage points yesterday after jumping 3.33 points the day before. The three-month rate, which rose yesterday the most since 1999, climbed a further 14 basis points to 3.20 percent today, according to BBA data.

Working Together

The Fed said on its Web site that it authorized other central banks to auction the dollar funds to financial institutions. A joint release said that the Bank of England, the Bank of Canada and the Swiss National Bank also participated. The ECB, Bank of England and Swiss National Bank allotted a combined $64 billion for one day today.

``The action is designed to address the continued elevated pressures in U.S. dollar short-term funding markets,'' the central banks said in the statement. ``The central banks continue to work together closely and will take appropriate steps to address the ongoing pressures.''

The world's biggest financial institutions posted almost $520 billion in subprime-related losses and writedowns since the start of last year. Eleven U.S. banks collapsed since January. Corporate bond sales in the U.S. and Europe slumped 42 percent from a year ago, according to data compiled by Bloomberg.

Widening Spreads

The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, widened 8 basis points to 310 basis points today. That's higher than the 300 basis-point spread reached Oct. 20, 1987, when stocks collapsed around the world on what became known as Black Monday.

``The demand for liquidity has soared and has pushed banks to hoard cash,'' said Eoin O'Callaghan, a London-based economist for BNP Paribas SA. ``Market-based liquidity has dried up.''

The difference between the Libor 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 147 basis points today, the most since at least December 2001, adding to yesterday's 22 basis-point increase. The spread averaged 8 basis points in the 12 months to July 31, 2007, before the credit squeeze started.

To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Kim-Mai Cutler in London at kcutler@bloomberg.net