Wednesday, March 11, 2009

Libor inching up - this could be a problem

This is not good news: banks are starting to hoard cash. From Bloomberg (hat tip, reader Jay):
The cost of borrowing in dollars is rising as the global recession deepens and central bank efforts to prop up the financial system fail to prevent a growing number of banks from requiring government bailouts.

The London interbank offered rate, or Libor, that banks say they charge each other for three-month loans stayed at 1.33 percent today, near the highest level in since Jan. 8 and up from this year’s low of 1.08 percent on Jan. 14, the British Bankers’ Association said. The Libor-OIS spread, a gauge of bank reluctance to lend, widened to the most since Jan. 9.

Short-term borrowing costs are increasing as banks hoard cash and governments struggle to thaw credit markets after finance companies reported almost $1.2 trillion of writedowns and losses since the start of 2007. Banco Popolare SC yesterday became Italy’s first lender to seek state aid. Lloyds Banking Group Plc, the U.K.’s largest mortgage provider, ceded control to the government March 7. U.S. regulators seized 17 failing banks so far this year.

“The market is beginning to think that the solution is either not politically possible, or we can’t afford it, or maybe there isn’t a solution,” said Bob Baur, chief global economist at Des Moines, Iowa-based Principal Global Investors, which manages $198 billion of assets. Libor’s rise “is just another indication of that concern,” he said.
Brings back memories of September 2008.

Rebecca Wilder


  1. Hey Rebecca,

    Interesting post. I wrote something this morning that touches on a few points you made. At this time it seems as though the gov. and banks are locked in this "tug-of-war" so to speak. Banks (especially those receiving TARP funds) are juggling attempts to preserve and raise capital while exercising the government's expectations for additional lending.

    With the LIBOR increasing, this just exasperates that back-and-forth struggle.

    “The market is beginning to think that the solution...not politically possible."

    Nice post,

  2. This is a rock and hard place proposition.

    If banks are forced into lending, they're going to make themselves more insolvent.

    If banks hoard cash, they're going to get politically pressured and eventually possibly cut off- making themselves more insolvent.

    This is just bailout money going into a black hole of ridiculousness.

    The government needs to either bite the bullet and purchase outright all the bad assets at a huge loss, and risk a taxpayer revolt, or bite the bullet and nationalize the banks outright, and risk a market panic.

    Walking this in-between-let's-buy-time-and-hope-the-economy-recovers-so-the-banks-aren't-insolvent-anymore play is clearly reaching its limits.

  3. What did you think of the announcements that the big banks are making money now? GM doesn't need a cash infusion this month. What is the prognosis given this blog?

  4. What is the prognosis given this blog?

    Hi Janie, I just don't know. I went to a conference in NY yesterday and listened to a talk about bank balance sheets from a big fixed income guy at Citi. Wasn't good - his punchline was that the credit crunch has only just begun. Banks are in trouble, and regulators are not equipped to handle it.

    Have a wonderful weekend and tell Jackie that I say hello!!!!



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