Banks Hoard Cash; Credit Card Bond Sales at Zero

Although LIBOR Plunged For 17 Consecutive Days it is not a sign of a huge increase in willingness to lend. Inquiring minds note that Libor's Biggest Drop Fails to Spur Loans.

The London interbank offered rate, or Libor, for three- month loans fell to 2.51 percent today, from 4.82 percent on Oct. 10. The rate is still 151 basis points more than the Federal Reserve's target interest rate for overnight bank loans, compared with an average of 22 basis points in the five years before the global credit crisis began in August 2007.

"Banks are cutting back, the economy is in a deepening recession and in that environment, I don't think banks are going to become a lot more willing to extend credit soon," said Jan Hatzius, chief U.S. economist in New York at Goldman Sachs Group Inc., the world's biggest securities firm.

"No one wants to lend because they are still wary of values of bank balance sheets, and no one wants to borrow from the money market because they can borrow directly from the central banks," said Alessandro Tentori, a fixed-income strategist at BNP Paribas SA in London.

Lender Of Only Resort

That last paragraph above sums up the problem nicely. Because the Fed has six new lending facilities, all of them offering cheaper rates than can be found elsewhere, there is little reason to go anywhere but the Fed for those eligible to do so.

Funding Drought Slams China

Efforts to stimulate lending are failing not just in the US but around the globe. Please consider Funding Drought Slams Chinese Plans as Banks Shun Plea to Lend.

China's largest banks, with 4 trillion yuan of cash, are resisting government efforts to boost lending to 42 million small and medium-size companies that drove the economic boom of the past decade.

Half the nation's toy exporters have closed this year, and 67,000 smaller enterprises filed for bankruptcy in the first half, according to government statistics. Companies with assets of less than 40 million yuan provide three-quarters of urban jobs and 60 percent of China's gross domestic product.

After five years of economic growth above 10 percent, the rate may slow to 5.8 percent this quarter, according to a Nov. 3 estimate by Credit Suisse Group AG. That would be the lowest rate since at least 1994, according to data compiled by Bloomberg.

"It's wishful thinking for the government to try to talk banks into lending to stimulate the economy," says Li Qing, a Shanghai-based analyst at CSC Securities HK Ltd. "Banks are holding onto their purse not because they are bound by the quota, but because they are expecting mounting defaults and failures."

"Chinese banks are getting smarter and they won't blindly follow lending directives from the top any more," says Leo Gao, who helps oversee the equivalent of $2.3 billion at APS Asset Management Ltd. in Shanghai. "We've seen banks start to cut back loans to real estate and exporters since the second quarter as they know an outbreak of bad loans is on the horizon."

Credit Card Bond Sales at Zero

For the first time since 1993, Credit Card Bond Sales at Zero.

Credit card companies were shut out of the market for bonds backed by customer payments in October for the first time in more than 15 years, as investors shunned the debt amid the global credit freeze.

A weakening job market and a looming recession are making it harder for consumers to make monthly payments, eroding confidence among investors about the safety of credit-card-backed bonds. It's the first month since April 1993 that there have been no sales, according to Wachovia Corp. data. Issuers sold $17.1 billion of the debt in October 2007, the data show.

"Nobody is eager to put money to work given the uncertainty in the market," said James Grady, a managing director at Deutsche Bank AG's asset management unit. "When you think it can't get worse, it continues to get worse. There is not a demand" for these bonds.

Banks are hoarding cash because defaults are rising, unemployment is rising, and it simply makes no sense to lend. Bank balance sheets are already stuffed to the gills.

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