[NYTr] Central banks fail to calm money markets as cash hunger grows

[All the News That Doesn't Fit]

Financial Times via GATA - Sep 25, 2007
http://www.ft.com/cms/s/0/756fe446-6b9c-11dc-863b-0000779fd2ac.html

Central banks fail to calm money markets as cash hunger grows

Central Banks' Actions Fail to Calm Money Markets

By Michael Mackenzie, Stacy-Marie Ishmael, Ralph Atkins, 
and Gillia Tett 

The European Central Bank faced a fresh surge in demand for liquidity
on Tuesday when it allocated weekly refinancing funds at an average
of 4.29 percent, the highest spread over the minimum bid rate for
almost five years.

The unexpectedly strong appetite suggests the ECB is again facing
difficulties bringing interest rates in line with its 4 percent
main rate. Tuesday's auction bids totalled E369 billion compared
with its estimated "benchmark" requirement of E157 billion.

The pattern is likely to trigger unease among policy makers since
it suggests the mood in the global money markets remains nervous,
irrespective of the emergency actions taken by central banks in
recent days.

The Bank of England will on Wednesday conduct an auction of L10
billion worth of three-month money, the first of four weekly sales
designed to help lenders, and this is expected to provide another
key indication of how badly the banks need cash.

In recent days, the cost of borrowing sterling on an overnight basis
and three-month basis has fallen back slightly. However, by historic
standards, it remains elevated and some bankers say the true cost
of borrowing funds is higher than official quotes suggest.

Meanwhile in the US, the euphoria that galvanised investors after
the Federal Reserve cut rates last week is fading as the focus
shifts to how a slower US economy and the housing slump will affect
the credit and mortgage markets.

"The future of housing is still very much in doubt and will likely
continue to be that way for quite some time," said Kevin Giddis,
managing director, fixed income at Morgan Keegan & Co. "The market's
view today is that this will depress the other parts of the US
economy and the Fed will be forced to act again."

In the wake of the Fed's rate cut, equities posted their strongest
weekly performance since March. However, the tone of credit and
mortgage markets has soured this week as the dollar has set a string
of record lows against the euro. Further deterioration in the housing
sector is also creating losses. The riskiest slice of the ABX index,
which tracks subprime mortgage bonds, fell to a new low of 29.5
cents on the dollar on Tuesday.

"Most of the eventual loan delinquencies and foreclosures in recently
originated subprime mortgage securitisations have yet to translate
into realised capital losses," said Derrick Wulf, portfolio manager
at Dwight Asset Management.

Though US money markets initially improved after the rate cut, some
interbank rates remain elevated compared with the 4.75 per cent Fed
funds rate. And the failure of the London interbank offer rate
(Libor) to fall further since the Fed meeting has sparked a breakdown
in the December eurodollar interest rate future. One-week US dollar
Libor has moved higher in recent days and traders say there are
funding concerns as the third quarter ends on Friday.

"It appears we will need to get through this week's quarter-end
book squaring before we'll see further improvement in money markets,"
said Ted Wieseman, economist at Morgan Stanley.

* * *

GATA is a civil rights and educational organization based in the
United States and tax-exempt under the U.S. Internal Revenue Code.
Its e-mail dispatches are free, and you can subscribe at
http://www.gata.org/.