European Credit Markets Deteriorate Dramatically

Credit markets have deteriorated badly in both the EU and UK.

The ECB is set to pump cash into money markets over liquidity concerns.

Fresh emergency action to pump funds into the money markets was announced on Friday night by the European Central Bank amid renewed fears that liquidity in the credit markets is again starting to dry up. On Friday night, the bank said it would inject an unspecified amount of extra liquidity next week, noting “re-emerging tensions” – and would do so until at least the end of the year.

Earlier, Jean-Claude Trichet, ECB president, had pledged continuing action to keep short-term money market interest rates in line with its main policy rate. The new promise of intervention came as three-month US interbank rates rose for the eighth day in a row to 5.04 per cent, more than half a point higher than the US Fed Funds target rate of 4.5 per cent.

Three-month money usually trades just above the Fed Funds rate which is 4.5 per cent. Europe and UK money markets are showing similar strains. The latest data will knock European policymakers’ confidence that the eurozone can remain relatively immune from the US subprime mortgage crisis, although few economists expect a serious slump.

Few Economists expect a slump. Is this funny or sad?

In the UK the Worse to come, warns Bank chief.

The Bank of England deputy governor has warned that money markets may be set for an even bigger squeeze before the end of the year, as wholesale borrowing rates soared yet higher. Sir John Gieve, the Bank's deputy governor for financial stability, told a hedge fund conference that "there still may be more bad news to come". His words echo those of the Governor, Mervyn King, last week, though credit markets have deteriorated dramatically since.

The three-month London interbank offered rate for sterling, known as BBA Libor, rose to a two-month high of 6.49pc, indicating that banks are unwilling or unable to lend to each other.

Analyst Jamie Dannhauser said: "The possibility of a severe credit squeeze is real and after today's preliminary money numbers for October it may already be under way."

He said the figures also suggested that the banks were unable or unwilling to securitise any assets at all last month, as it became all but impossible to sell mortgage debt to investors.

Unable Or Unwilling

Now where have I see that phrase before?
It sounds vaguely familiar.
Oh wait, I remember.

• Bank Borrowing Costs Rise
• Economic Chicken vs. Mutually Assured Destruction
• Interview with Paul Kasriel

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com
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