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Monday, August 25, 2008

libor, credit crunch and money markets: systems still stressed and may get worse

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We read an article on bloomberg regarding the credit conditions in market markets. The libor rates seem to signal that lending is getting tightened, and that it may get worse as we move closer to the last quarter when banks check their banks all at the same time period.

Let see how banking stocks will behaves, particularly on a possible revisit of the lows sometime before the end of the year.

Excerpts from the Bloomberg Articles are:

`It's like an ongoing nightmare and no one is sure when we're going to wake up,'' said [Stuart] Thomson, a money manager in Glasgow at Resolution, which oversees $46 billion in bonds. ``Things are going to get worse before they get better.''...

``These problems going into year-end are likely to be worse this time round because of the amount banks have to refinance in December,'' Thomson said, citing a figure of $88 billion. ``The suspicion is that banks are still hiding losses. The banking system relies on trust and at the minute there quite simply isn't any.''

Banks are charging each other a premium of 77 basis points over what traders predict the Federal Reserve's daily effective federal funds rate will average over the next three months to lend cash. The spread is up from about 24 basis points in January, and may widen to 85 basis points, or 0.85 percentage point, by mid-December, prices in the forwards market show....

Trust among banks remains low even after the Fed cut its target rate for overnight loans to 2 percent from 5.25 percent in September and created three emergency lending programs, including the Term Auction Facility, or TAF. In total, the Fed has provided almost $1 trillion of emergency loans.....

``The problem is much more systemic than was widely anticipated a year ago,'' said Michael Darda, chief economist for MKM Partners LLC in Greenwich, Connecticut. ``Not only bank balance sheets but home balance sheets are under pressure due to falling house prices.''...

``Libor markets aren't reflective of the entire banking system but of three or four major banks that continue to have pressure on liquidity,'' said Saumil Parikh, a money manager who helps oversee $688 billion at Pacific Investment Management Co., in Newport Beach, California. ``That spreads to the entire system because you are not really sure who you are going to end up lending to through the Libor market.''

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