eurolibor surges to year high

Interest rates in sterling money markets jumped on Friday with three-month interbank lending at its highest rate since the start of the year and the highest one-day move since rates began rising again in mid-February. Huw Van Steenis, head of banking analysis at Morgan Stanley, said the pressures in money market rates reflects the fact that a significant supplier of bank liquidity - Structured Investment Vehicles (SIVs) have simply disappeared from the market in the past year. “Half of the buyers of senior bank debt are on buyers’ strike,” Mr Van Steenis said. SIV had been heavy buyers of commercial paper and medium-term notes, often issued by banks to finance their own holdings of mortgage and other asset-backed securities. Because this source of funding has dried up, banks are now having to look to each other for cash, he said. Moreover, as credit markets seized up, corporate borrowers who might once have turned to the credit markets for capital are now also looking to their bankers for cash. This amounts to “an involuntary expansion of balance sheets for banks” Mr Van Steenis said. The easiest way for banks to shrink balance sheets is simply to cut the amount of lending each instution provides to the others. “What is good for each bank individually is not good for the market as a whole,” he said.