Tell Tale Sign of Recession

at this rate asset prices will be dirt cheap very soon. and why should american taxpayer be saddled with unperforming loan the the debtor has walkout and declared himself bankrupt anyway? to add to the injury, the mortgaged property have been sold at cheaper price, or would be soon. usa govt better of use that usd700billion to help the NINJA ( no income,no job, no asset) by increasing govt purchases (housing, training, public work, education etc). even if they provide interest free loan to homeless, poor people etc to get housing, training and education that would be better than the current plan. the economy would stand up again sooner.

you see the lesson here..
wealth is a mirage, we shoud strive for the Hereafter.

Money-Market Rates Climb After U.S. Congress Rejects Bailout

By Gavin Finch and David Yong

Sept. 30 (Bloomberg) -- Money-market rates in Europe jumped to records after the U.S. Congress rejected a $700 billion rescue plan for financial companies, heightening concern more banks will fail, and as lenders hoarded cash as the third quarter ends.

The euro interbank offered rate, or Euribor, that banks charge each other for one-month loans climbed to a record 5.05 percent today, the European Banking Federation said. Rates on three-month loans in dollars were as high as 10 percent as of 10:50 a.m. in London, said Ronald Tharun, a money-market trader in Stuttgart at Landesbank Baden-Wuerttemberg, Germany's biggest state-owned lender. The dollar Libor-OIS spread, a gauge of the scarcity of cash, advanced to a record. Rates in Asia also rose.

``The money markets have completely broken down, with no trading taking place at all,'' said Christoph Rieger, a fixed- income strategist at Dresdner Kleinwort in Frankfurt. ``There is no market any more. Central banks are the only providers of cash to the market, no-one else is lending.''

Credit markets have seized up, tipping banks toward insolvency and forcing U.S. and European governments to rescue five banks in the past two days, including Dexia SA, the world's biggest lender to local governments, and Wachovia Corp. Money- market rates climbed even after the Federal Reserve yesterday more than doubled the size of its dollar-swap line with foreign central banks to $620 billion. Banks yesterday borrowed the most since 2002 at the ECB's emergency rate.

Libor Rate

The two-month Euribor rate reached 5.13 percent today, also an all-time high, the EBF said.

The London interbank offered rate that banks charge each other for three-month dollar loans increased 12 basis points to 3.88 percent yesterday, the highest level since Jan. 18. Libor, set by 16 banks including Citigroup Inc. and UBS AG in a daily survey by the British Bankers' Association, is used to calculate rates on $360 trillion of financial products worldwide, from home loans to credit derivatives.

Funding constraints are being exacerbated as companies try to settle trades and buttress balance sheets over the quarter-end, balking at lending for more than a day.

The three-month interbank offered dollar rate in Singapore jumped to an eight-month high of 3.90 percent. The three-month rate in Hong Kong rose by the most in almost a week to 3.664 percent. The difference between the rate Australian banks charge each other for three-month loans and the overnight indexed swap rate reached 98 points, close to a six-month high. The gap has averaged 45 basis points this year.

`Counterparty Fear'

Dexia got a 6.4 billion-euro ($9.2 billion) state-backed rescue, according to a statement from Belgian Prime Minister Yves Leterme today. The U.K. Treasury yesterday seized Bradford & Bingley Plc, Britain's biggest lender to landlords, while governments in Belgium, the Netherlands and Luxembourg extended a lifeline to Fortis, Belgium's largest financial-services firm. Hypo Real Estate Holding AG received a loan guarantee from Germany, and Iceland agreed to rescue Glitnir Bank hf.

``Counterparty fear in the banking sector is at a new extreme,'' said Greg Gibbs, director of currency strategy at ABN Amro Holding Bank NV in Sydney. ``Credit conditions are as tight as a drum. Unless this settles down, central banks would need to cut rates globally to bring funding costs down.''

Futures on the Chicago Board of Trade show a 66 percent chance the Fed will trim its 2 percent federal funds target rate by 50 basis points in October, surging from zero percent a month ago. The odds of a quarter-point reduction are 34 percent.

Hoarding Money

Banks yesterday borrowed 15.5 billion euros from the ECB at the emergency overnight marginal rate. The ECB's marginal lending rate is 5.25 percent. The Bank of Japan injected more than 19 trillion yen ($182 billion) into the country's system over the past two weeks, the most in at least six years. The Reserve Bank of Australia pumped in A$1.95 billion ($1.6 billion) today and has injected more than A$2 billion a day on average since Sept. 15.

The Libor-OIS spread, the difference between the three-month dollar rate and the overnight indexed swap rate, stood at 233 basis points, showing cash scarcity is at a record.

The difference between what banks and the U.S. Treasury pay to borrow money for three months, the so-called TED spread, was at 331 basis points today after breaching 350 basis points for the first time yesterday. The spread was at 110 basis points a month ago.

``We can be sure that funding pressures are not going to ease while there is so much uncertainty,'' said Adam Carr, senior economist in Sydney at ICAP Australia Ltd., part of the world's largest inter-bank broker. ``Cash is going to be at a premium. There's really no end in sight.''

To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; David Yong in Singapore at dyong@bloomberg.net
Last Updated: September 30, 2008 06:02 EDT