‘Heart attack’ markets face test
By Gillian Tett in London and Catherine Belton in Moscow - Financial Times
Published: September 4 2007 21:09 | Last updated: September 4 2007 21:09
Capital markets face a critical period, which will determine how the financial system copes with this summer’s credit sector “heart attack”, a senior international banker warned on Tuesday.
Hans Jörg Rudloff, chairman of Barclays Capital, said the next four to six weeks would be crucial as investors tried to establish new price levels for risk and banks expanded balance sheets to take on assets held by stricken investment vehicles.
“This is the big question: are we capable of establishing a new price level for these assets? If we stay stuck, the patient is going to die,” Mr Rudloff said in a speech to Russian executives in Moscow.
“Trading of assets has to be resumed,” he said, speaking in his capacity as chairman of the International Capital Markets Association, rather than Barclays Capital chairman. Mr Rudloff said he hoped markets were over the worst.
His comments came amid signs that parts of the financial system are paralysed by a sense of mistrust over credit losses. Bankers in London warned that parts of the interbank lending market have frozen as institutions scramble to raise finance – and hoard it.
The London interbank offered rate (Libor) is important because it is accepted as the risk-free rate for transactions around the world. For example, the interest rates on leveraged loans, which finance private equity buy-outs, are typically based on Libor. The scramble in the interbank market pushed the three-month sterling Libor rate to 6.7975 per cent on Tuesday, more than 100 basis points above the Bank of England’s official base rate of 5.75 per cent, and its highest level since the 1998 financial crisis.
The three-month US dollar-denominated Libor rate – which normally hovers slightly above the Federal Funds rate, now at 5.25 per cent – rose to nearly 5.7 per cent, up from nearly 5.67 per cent on Monday. The rate a month ago was 5.36 per cent.
Pressure in the sterling money markets has sparked calls among London bankers for the Bank of England to intervene. Some hope new initiatives may emerge as early as tomorrow when the central bank holds its regular monetary policy meeting.
The Bank of England has so far refrained from any emergency measures, in sharp contrast to the European Central Bank and US Federal Reserve. Its officials are wary of taking any step that might be seen as encouraging excessive risk taking.
Marc Ostwald, fixed-income strategist at Insinger de Beaufort, said: “The bank is now in a very difficult position . . . it will be damned if it does intervene, and damned if it doesn’t.”