Money-Market Rates Jump as Bank Rescues Stoke Lending Concern

Sept. 29 (Bloomberg) — The cost of borrowing in euros for three months rose to a record after government-led bank bailouts heightened concern that more will fail, prompting financial institutions to hoard cash.

The euro interbank offered rate, or Euribor, climbed 10 basis points to 5.24 percent, the European Banking Federation said today. That’s the biggest jump since June. The London interbank offered rate, or Libor, for three-month dollar loans rose to 3.88 percent, the highest level since Jan. 18 and up from 2.81 percent a month ago. Singapore’s benchmark rate for such loans increased to the highest level in eight months.

Rising rates show central-bank attempts to breathe life back into money markets haven’t succeeded, even after U.S. lawmakers agreed on a $700 billion plan to remove tainted assets from bank balance sheets. The ECB said today it will make additional funds available to banks through the end of the year in “special” auctions. The central banks of Japan and Australia added more than $20 billion to money markets.

“The root of the banking story is in the money markets, which are still in awful shape,” said Padhraic Garvey, the Amsterdam-based head of investment-grade debt strategy at ING Bank NV. “Banks are dealing with central banks for liquidity purposes, but are very careful about dealing with one another in this environment, which effectively means that the interbank wholesale- money market is not working.”

The U.K. Treasury seized Bradford & Bingley, Britain’s biggest lender to landlords, while governments in Belgium, the Netherlands and Luxembourg extended an 11.2 billion-euro ($16.3 billion) lifeline to Fortis, Belgium’s largest financial-services firm. Hypo Real Estate Holding AG, Germany’s second-biggest commercial-property lender, received a 35 billion-euro loan guarantee from the state to fend of insolvency.

`More Victims’

“Tensions remain elevated and liquidity is drying up,” said Patrick Jacq, a fixed-income strategist at BNP Paribas SA in Paris. “After Fortis, this situation will persist as people worry that there will be more victims. Confidence has not been restored yet and that’s a prerequisite before rates come down.”

The Libor-OIS spread, the difference between the three-month dollar rate and the overnight indexed swap rate, jumped to a record 219 basis points today, after breaching 200 for the first time on Sept. 25. It averaged 8 basis points in the 12 months to July 31, 2007, before the credit squeeze began.

Funding is typically tighter at the end of quarters as companies try to settle trades and buttress their balance sheets.

The world’s largest central banks are injecting liquidity into money markets as more than $554 billion in writedowns and losses tied to the U.S. mortgage market prompt banks to stockpile cash to meet their own funding needs.

Extra ECB Cash

The ECB said it will loan banks extra cash today for about five weeks. “The special term refinancing operation will be renewed at least until beyond the end of the year,” it said in a statement. The ECB also lent banks $30 billion for one day in a separate operation.

Banks deposited a record 28.1 billion euros with the ECB on Sept. 26 as they sought a haven for their cash, the central bank said today.

The difference between what banks and the U.S. Treasury pay to borrow money for three months, the so-called TED spread, was at 303 basis points today. It rose last week to the most since Bloomberg began compiling the data in 1984. It was 110 basis points a month ago.

Singapore’s three-month interbank offered rate for U.S. dollars, or Sibor, increased for a third day, adding 1 basis point to an eight-month high of 3.79 percent, according to the Association of Banks in Singapore. In Hong Kong, the three-month Hibor rose 9 basis points to 3.49 percent, the Association of Banks in Hong Kong said.

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