Money Markets to Exhibit Strains `Well Into Future,' BIS Says By Lukanyo Mnyanda June 9 (Bloomberg) -- Strains in money markets will probably stay ``severe well into the future'' as banks struggle to raise cash and credit-market losses deepen, according to the Bank for International Settlements. The difference, or spread, between London interbank offered rates for the dollar and overnight index swap rates was as wide in May as three months earlier, indicating ``money markets continued to show clear signs of extreme stress,'' the Basel, Switzerland-based BIS wrote in a quarterly report. The BIS was formed in 1930 and acts as a central bank for the world's monetary authorities. ``This appeared to imply expectations that interbank strains were likely to remain severe well into the future,'' BIS analysts Ingo Fender and Peter Hordahl wrote in the report. ``With market rumors proliferating about imminent liquidity problems in one or more large investment banks, banks became increasingly wary of lending to others.'' Banks' reluctance to lend may slow a recovery in the world's biggest economies after the seizure in money markets that began last year sent stocks tumbling and prompted central banks to pump cash into the financial system. Banks have suffered $387 billion of losses and writedowns from mortgage-related securities since the start of 2007, according to data compiled by Bloomberg. Lehman Brothers Holdings Inc., the fourth-biggest U.S. securities firm may raise as much as $5 billion this week to shore up its balance sheet, a person with knowledge of the matter said June 6. TED Spread The difference between what the U.S. government and banks pay to borrow in dollars for three months, the so-called TED spread, widened to 86 basis points, or 0.86 percentage point, last week, the most since May 15. The spread averaged about 39 basis points in the seven months through July, before the global credit markets seized up. The average is about 133 basis points since then, and reached 240 basis points in August. Money-market tensions ``had appeared to ease somewhat'' before JPMorgan Chase & Co., backed by about $30 billion in Federal Reserve guarantees, stepped in to rescue Bear Stearns Cos. in March, the BIS said. That highlighted the continued risks faced by lenders, the report said. The Fed has cut borrowing costs seven times since September and offered new loans to banks to revive lending. The European Central Bank injected $500 billion in a single day in December. The difference between the rate banks charge for three-month dollar loans relative to the overnight indexed swap rate, the so- called Libor-OIS spread, indicates lenders are still hoarding cash. The spread was 69 basis points June 6, compared with an average 11 basis points in the 12 months to July 2007. It widened to 87 basis points on April 21. `Libor Malaise' Investor concern that the London interbank offered rate, or Libor, had lost credibility added to the ``tense situation'' in money markets, the BIS said. The British Bankers' Association, which oversees Libor, resisted calls to overhaul the 24-year-old system May 30. The BIS said in a March report some members may have understated their rates to avoid being perceived as having difficulty raising financing. Financial products worth about $150 trillion are indexed to Libor, according to the BBA's Web site. ``The Libor malaise continues and no relief is in sight,'' Christoph Rieger, a fixed-income strategist in Frankfurt at Dresdner Kleinwort, the investment bank owned by German insurer Allianz SE, wrote in a report. To contact the reporter on this story: Lukanyo Mnyanda in London at US0003M:IND BBA LIBOR USD 3 Month USSOC:IND USD SWAP OIS 3 MO .TEDSP:IND TED Spread FDTR:IND Federal Funds Target Rate US US0003M:IND BBA LIBOR USD 3 Month
