Asian Money Rates May Rise as Russia, Argentina Add to Concerns

By Candice Zachariahs and Garfield Reynolds

Oct. 24 (Bloomberg) -- Asian money-market rates may rise, paring this week's declines, as the global credit crisis pushed up developing nations' borrowing costs near to a six-year high after Standard & Poor's threatened to cut Russia's debt ratings.

The rate Australian banks charge each other for three-month loans rose 3 basis points, or 0.03 percentage point, to 5.89 percent at 10:08 a.m. in Sydney, the highest since Oct. 15. The extra yield investors demand to own emerging-market government bonds instead of U.S. Treasuries rose 27 basis points yesterday to 8.29 percentage points, the biggest since November 2002, according to JPMorgan Chase & Co.'s EMBI+ index.

Credit markets froze after Lehman Bothers Holdings Inc. collapsed on Sept. 15, prompting governments and central banks worldwide to bail out financial institutions and inject cash into money markets. Banks remain reluctant to lend even after funding costs declined the past week, because of concerns a looming global recession will undermine economies from Argentina to South Korea and Hungary.

``That trend of improvement is there but there have been some renewed worries in the emerging markets,'' said Besa Deda, acting chief economist and strategist at St. George Bank Ltd. in Sydney. ``There are still credit issues in the market, funding is still difficult.''

Ex-Soviet republic Belarus added to requests from Iceland, Pakistan, Hungary and Ukraine for at least $20 billion of emergency loans from the International Monetary Fund as the financial crisis leaves nations unable to repay their debt.

Hoarding Cash

Banks have been hoarding cash as financial institutions including American International Group Inc. and Fortis Group had to seek government help. Australia & New Zealand Banking Group Ltd., Australia's third-biggest bank, yesterday said it had added A$19.2 billion ($12.9 billion) this month so it can cover any funding shortfalls, according to the company's full-year earnings report today.

Australian banks reduced deposits at the central bank to A$6.15 billion yesterday, down A$51 million from Oct. 22, the Reserve Bank of Australia said today on its Web site. The RBA added A$785 million to money markets today after estimating there would be a A$610 million shortfall.

Australian financing costs rose for a third day. The difference between the rate Australian banks charge each other for three-month loans and the overnight indexed swap rate, a measure of funding availability, rose 4 basis points to 76. The gap, which averaged 44 points in the first six months of 2008, was 75 points a week ago.

Redemptions Suspended

Perpetual Ltd. and Axa Asia Pacific Holdings Ltd. suspended redemptions on A$4.1 billion of income and mortgage funds. Government guarantees on bank deposits are prompting investors to switch cash from such funds into financial institutions covered by the state.

The guarantee sparked as much as $A20 billion in outflows from mortgage funds, the Australian Financial Review said Oct. 22, citing fund research company Morningstar.

Asian rates increased yesterday for the first time since Oct. 16 and the commercial-paper market shrank for a sixth- straight week. Hong Kong's three-month interbank lending rate, or Hibor, rose yesterday for the first day in five, advancing 9.6 basis points to 3.24 percent. The rate has declined 95 basis points since Oct. 17.

The London interbank offered rate, or Libor, for three- month dollar loans declined yesterday by the smallest margin in nine days.

Funding Availability

The Libor-OIS spread, a measure of funding availability, rose 1 basis point to 255 basis points. It was at 364 basis points on Oct. 10 and 85 basis points on Sept. 12, three days before Lehman Brothers Holdings inc. collapsed.

Libor for three-month dollar loans dropped less than a basis point to 3.535 percent yesterday, from 3.541 percent yesterday, the British Bankers' Association said. The overnight rate rose for the first time in 10 days, climbing 9 basis points to 1.21 percent.

Optimism that central bank cash injections will revive bank lending has given way to concern the shortage of credit is driving the global economy into a recession.

Developing nations' borrowing costs rose to the highest in six years yesterday and Daimler AG, the world's second-biggest maker of luxury cars, cut its full-year earnings forecast by 1 billion euros ($1.29 billion). The cost of protecting corporate bonds from default surged to a record and Standard & Poor's reduced its outlook on Russia's foreign debt rating.

``Liquidity seems to have disappeared out of the interbank market,'' David Buik, a market analyst in London at BGC Partners Inc., said yesterday. ``Lending has dried up. Ugly rumors are permeating around the market that other, smaller countries may be experiencing similar problems to Iceland.''

Libor is set by a panel of banks in a daily survey by the British Bankers' Association at about noon in London. Members provide estimates on how much it would cost to borrow in 10 currencies for terms from one day to a year. About $360 trillion of financial products worldwide, from mortgages to company loans and derivatives, is tied to the Libor.

To contact the reporters on this story: Garfield Reynolds in Sydney at greynolds1@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net.