Maybe Apache Ben should make a “Defcon 6” category. Because the Fed’s Defcon 5 strategy isn’t working.
Bloomberg also wonders if someone has blundered, following the failure of yesterday’s charge of the Bernanke brigade.
Dec. 13 (Bloomberg) — The interest rates banks charge each other for short-term loans in Europe failed to decline from the highest levels in seven years a day after central banks joined forces to break a logjam in money markets.
The cost to borrow for three months remained at 4.95 percent, the British Bankers’ Association said today. That’s 95 basis points, or 0.95 percentage point, more than the European Central Bank’s benchmark interest rate, compared with 57 basis points a month ago. The difference averaged 25 basis points in the first half of the year, before losses on securities linked to U.S. subprime mortgages contaminated credit markets.
The highest short-term rates since December 2000 suggest that the first coordinated central bank action since the Sept. 11, 2001, terrorist attacks may not be enough to revive interbank lending. The cost of borrowing dollars fell 7 basis points to 4.99 percent, about half what was anticipated, based on prices of Libor futures contracts.
“It’s not going to help us find an exit to this crisis,” said Cyril Beuzit, head of interest-rate strategy at BNP Paribas SA in London. “These measures aren’t going to address the root cause of the crisis. Banks are still reluctant to lend money to each other because there are serious concerns about potential further bad news.”
Reacting to Losses
Central banks in the U.S., U.K., Canada, Switzerland and the euro region agreed yesterday to coordinate efforts to promote lending and restore confidence in money markets. Policy makers are reacting to more than $66 billion of losses announced by banks this year and estimates of about $300 billion more on securities linked to subprime mortgages, collateralized-debt obligations and structured investment vehicles, or SIVs.
Futures trading in Europe is signaling the measures won’t succeed in bringing down borrowing rates into next year.
Implied yields on Euribor futures contracts expiring this month through June 2009 rose today, with the December contract climbing 6 basis points to 4.915 percent. The implied yield on the March 2008 contract gained 6 basis points to 4.6 percent.
“The markets don’t expect spreads to go down,” said Alexander Titsch-Rivero, head of derivatives and structured products in Frankfurt at BHF-Bank AG, a German private bank. “The actions by the central banks were just a placebo, a tranquilizer that doesn’t solve the problem of the mistrust among banks on one hand and the potential for more losses in credit on the other.”
Stocks, Bonds
The interest rate for euros compiled by the European Banking Federation was little changed at a seven-year high of 4.95 percent, compared with 4.18 percent at the start of July.
Stocks extended declines, with the Euro Stoxx 600 index falling 2 percent. Yields on three-month Treasury bills, regarded as a haven for investors in times of turmoil, held at 2.87 percent, close to the lowest since Aug. 20.
The difference between the interest banks and the government pay for three-month loans, called the TED spread, rose to 2.21 percentage points yesterday from 1.59 percentage point on Sept. 18, when the Fed began lowering rates.
“It’s a very disturbing sign,” said Christoph Rieger, a fixed-income strategist at Dresdner Kleinwort in Frankfurt. “I’m alarmed by the impact this is having, which underscores that the funding difficulties out there are enormous.”
The Fed plans four auctions, including two this month that will add as much as $40 billion, to increase cash in the U.S. The Bank of England said it would widen the range of collateral it will accept on three-month loans.
Who’d have thought: Banks don’t trust each other more just because the Federal Reserve extends more life support to the weakest hands. Being able to get more poker chips from the central banks for free–courtesy of rentiers–does not make you a more credible poker player. Do you have to be as “brilliant” as Mishkin to be too stupid to understand that?
How long until the discredited Beltway eminences pen another round of op-eds telling us to “ignore the moral hazard fundamentalists”and throw still more paper at this persistently “temporary” problem?
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