The global credit freeze is intensifying with banks and other financial groups now cut off from funding across national boundaries and within some markets and depending more and more on their central banks for support.
Stockmarkets weakened in the US, Europe and Asia. Australia was off around 2% this morning with commodity and financial stocks down as gold, oil, silver, copper prices tumbled on commodity markets and the fears of recession rose. Wall Street was off 4%. Banks were also weaker as markets watched the US bail plan’s progress in the US House of Representatives, where a vote is expected overnight or tomorrow, our time.
But overlying all of this is the intensifying credit freeze. After six banks in Europe and one in the US were bailed out at the start of the week, banks have gone back into their shells, refusing to lending to anyone but their central banks. Cross border credit has dried up and some banks must be now sourcing themselves internally and or from their central banks. Banks are still keeping tens of billions of dollars at central banks in low yielding accounts.
In Australia this morning the RBA injected $A1.57 billion into the financial system, a bit more than the system deficit of $A1.2 billion. but the important figure was the size of the deposits in the Exchange Settlement Accounts the banks keep at the RBA: they totalled $A9.03 billion, still high, but down noticeably from the $A11.04 billion earlier in the week.
Tonight and the weekend (a long weekend in NSW) will be a big test and the size of the holdings in the ESAs will probably rise as they did last Friday, especially with the vote on the bailout plan to come. .
Bloomberg summed it up like this in a report just after 11am:
The crisis deepened after the worst month for corporate credit on record. Leveraged loan prices plunged to all-time lows, short-term debt markets seized up and even the safest company bonds suffered the worst losses in at least two decades as investors flocked to Treasuries. Credit markets have frozen and money-market rates keep rising even after central banks pumped an unprecedented $1 trillion into the financial system.
In New Zealand, the head of the country’s reserve bank, Dr Alan Bollard said today that NZ’s commercial banks are continuing to operate strongly amid the turmoil in global financial markets. In a speech in Auckland he said the banks “are well capitalized businesses and give no current reason for concern.”
In Europe, a brawl is brewing over the move by the Irish Government to guarantee its six leading financial groups, a move that has seen Britain, the EU and other countries express alarm as people withdraw funds and open accounts in Ireland. Not helping have been touting raids by email into Britain by Irish banks promoting their guarantees and safety. Britain is looking at boosting its deposit insurance to 50,000 pounds from 35,000 pounds and the state owned Northern Rock withdrew several savings product to try and quell the rush into its nationalised accounts.
Seeing the Irish banking system was on its knees on Monday with share prices down sharply and worries about the health of at least two, the guarantee is a bit rich.
Figures from the US Federal Reserve showed that US commercial banks and bond dealers boosted their borrowings in the past week from the central bank to a massive $US348.2 billion. That was up 60% and a major indicator of how tight the credit freeze is becoming.
Loans to commercial banks through the traditional discount rose about $US10 billion to $US49.5 billion as of yesterday, the Fed said in a weekly report dealers said that surpassed the previous record after the September 11 terrorist attacks.
Borrowing by securities firms totaled $US146.6 billion, up from $US105.7 billion. And the the new emergency program announced last month to assist money market funds banks borrowed $US152.1 billion up till Wednesday to buy commercial paper from money-market mutual funds. That was more than double the amount a week earlier and a real sign of the outflow of cash from these funds.
Despite this surge in fed lending and around $US190 billion in short term borrowings from the European Central Bank rates on three-month dollar US loans in America soared to a nine-month high as short-term corporate borrowing fell by the most ever. Rates in Europe also soared and the difference between US and European rates, which is a good indicator of the risk in borrowing cash remained at near record levels.
The Fed said that average daily lending to bond dealers in the week to Wednesday rose $US59.5 billion to $US147.7 billion as the central bank battles to keep the most important financial market in the world well lubricated.
The Fed separately has lent $US149 billion to commercial banks through the Term Auction Facility, an emergency program started last December. That program is now being expended to $US450 billion, the Fed said this week.
The reason for this lift in lending by the Fed to the bond markets and other dealers can be seen in the record contraction in the size of the US commercial paper market show the amount of commercial paper on issue in America fell by $US95 billion in the week to Wednesday evening, the largest drop since the Fed started compiling figures back in 2001.
In fact the past three weeks has seen more than $US200 billion has been taken out of commercial paper, which helps finance short term needs for companies and others, and has been heavily bought by money market funds which are now selling this paper heavily to raise cash to meet redemptions.
These money market funds have seen enormous outflows since Lehman Brothers filed for bankruptcy midway through September. That has sparked a flight to the safest place banks and other can find and helped convert the credit crunch into a credit freeze.
Crikey is committed to hosting lively discussions. Help us keep the conversation useful, interesting and welcoming. We aim to publish comments quickly in the interest of promoting robust conversation, but we’re a small team and we deploy filters to protect against legal risk. Occasionally your comment may be held up while we review, but we’re working as fast as we can to keep the conversation rolling.
The Crikey comment section is members-only content. Please subscribe to leave a comment.
The Crikey comment section is members-only content. Please login to leave a comment.