The Result of the Coordinated Efforts of the Central Banks to Increase Liquidity
This post meshes well with the post below concerning the coordinated efforts by the central banks to increase liquidity in euro-dominated money markets. Text is bold is my emphasis. From Bloomberg:
Interest rates on loans in euros stayed at a seven-year high, a day after global central banks teamed up in an attempt to thaw a freeze in money markets.
The three-month borrowing cost was at 4.95 percent, its highest level since December 2000, according to prices from the European Banking Federation today. That's 95 basis points more than the European Central Bank's benchmark interest rate and up from 4.18 percent at the start of July, before losses related to subprime mortgages contaminated money markets.
Policy makers in the U.S., U.K., Canada, Switzerland and the euro region agreed to the first coordinated action since the Sept. 11, 2001, terrorist attacks. The Federal Reserve said it will make $24 billion available to increase the supply of dollars into Europe. Banks have reported more than $66 billion in losses linked to U.S. subprime mortgages this year.
``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.''
The euro levels suggest that money-market rates for the dollar and pound, which will be set by the British Bankers' Association later, won't decline.
``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 U.S. central bank also plans four auctions that will add as much as $40 billion. The Bank of England said it would widen the range of collateral it will accept on three-month loans.
``It's a wake-up call for the global economy,'' Brown told lawmakers in Parliament in London today. ``The existing institutions aren't good enough. I'm going to make it my business to reform those institutions.''
(This last comment is interesting. I have thought for some time that the current credit crisis would lead to changes on how investment banks, commmercial banks, and governement agencies interact. Personally, the changes that will occur will be fairly significant, because the one thing that governments have learned in the most recent crisis is that there are holes in their jurisdiction of certain financial institutions, for example, mortgage companies, rating agnecies, etc.)