Faced with increasing rescue packages in Europe and elsewhere to bail out the battered banks, credit markets are showing tentative signs of inching towards normalcy, analysts said.
With Sweden being the latest entrant into the long list of countries offering a bailout package to support its banks, short-term lending rates on Monday displayed some tentative movement towards what used to be the normal phase of lending among banks.
For the first time since the collapse of Lehman Brothers, which triggered the financial meltdown in the United States and Europe, the three-month dollar-denominated London Inter-Bank Offered Rate (Libor) fell by almost 40 basis points from 4.41875 per cent on Friday to 4.05875 per cent on Monday.
“This is the first such decline during the last three months,” said a Geneva-based analyst, suggesting that there is a drop in short-term rates quoted in the euro, yen and Swiss franc.
The Euro Inter-Bank Offered Rate (Euribor) dropped to 4.97 per cent today, which is the lowest since the Lehman collapse. Clearly, there is more inter-bank lending in the last four to five days, with leading US commercial banks offering billions of dollars to their European counterparts.
Despite these declining trends in short-term rates, the inter-bank lending rates continue to remain high when compared with the central banks’ target rates. The Fed Funds rate, which is considered as a target rate, is 1.50 per cent, while the Libor is higher by over two-and-a-half percentage points.
The US Fed steeply reduced the Fed Funds rate in a move to encourage lending in short-term credit markets.
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Though chances of Libor returning to its old level look pretty thin, if it continues to drop to a level where the differential with the Fed Funds rate is reduced to about one percentage point, it would then improve the overall credit climate, analysts said.
“We see a slight improvement in the inter-bank market, but no breakthrough yet,” Juergen Stark, an official of the European Central Bank’s executive board, told German Radio recently, suggesting that the conditions are still somewhat precarious.
On Monday, the Swedish government announced a rescue package that would include guaranteeing $200 billion in bank debt. Besides, the Swedish government will inject fresh capital into some of its banks that are facing the financial crisis.
In a separate development, the French government also announced a scheme on Monday to subscribe to subordinated debt issued by its six biggest banks without acquiring voting rates. This is to enable the six major banks to increase lending to companies and households, the French Finance Minister Christine Lagarde told reporters.
Meanwhile, governments in leading European countries and in the United States are turning towards stimulus packages to minimise the likely adverse effects of a pronounced recession. The US Fed Chairman Ben S Bernanke approved the idea of a fiscal stimulus to mitigate the slowdown in the economy.