The interbank money market showed some signs of stress on Monday following news that Citigroup is in talks that could see the US government take a bigger stake in the ailing lender. This came a week after several ratings agencies warned a steep slowdown in emerging Europe would hurt the ratings of western European banks with exposure to the region.
Adding to the gloom was the failure of Japan's SFCG Co, a lender to small companies. Although it had little direct impact on markets, the news heightened fears of a deeper financial crisis. Capping it all, European Central Bank (ECB) President Jean-Claude Trichet said the eurozone's financial system is under severe strain and net credit flows have started to fall in recent weeks.
All of these added to pressure in the interbank money market, which is facing a long road to recovery after gumming up in the wake of Lehman Brothers' collapse in September last year. "Bank funding conditions have become more difficult over the past week as equity market jitters widen bank CDSs (Credit Default Swaps) and put pressure on Libor/OIS spreads," said Lena Komileva, economist at Tullett Prebon in London.
Three-month dollar London interbank offered rate (Libor) was fixed just below 1.25 percent on Monday, unchanged from Friday, but it traded at a wide 103 basis points above the corresponding Overnight Index Swap rate (OIS) or the anticipated central bank rate.
That spread, a closely watched indicator of interbank money market stress, was consistently seen at around 10 basis points before the credit crisis hit in mid-2007. It blew out above 360 basis points after the failure of Lehman Brothers.
Against this grim backdrop, the ECB is widely expected to cut its benchmark interest rate to record low of 1.5 percent from 2.0 percent next week.
The rate cut expectations have helped drive euro Libor rates lower with the three-month rate reaching its lowest since the euro currency was introduced in 1999 at around 1.87 percent. In Singapore, 3-month dollars were at 1.24 percent, down from 1.254 percent on Friday but still far wider than effective overnight fed funds rates around 0.22 percent.