EFFORTS BY central banks to ease strains in the money markets are failing to stop financial institutions from hoarding cash, stoking fears that the recent respite in equity markets may not signal the end of the credit crisis.
Banks' borrowing costs - a sign of their willingness to lend to each other - in the US, euro zone and the UK rose again even after the US Federal Reserve's unprecedented activity in lending to retail and investment banks against weaker than usual collateral and similar action in Europe.
The continued friction in the money markets came even as stock markets were showing signs of optimism. This was despite fresh US data showing consumers at their most pessimistic for 35 years and house prices falling at the fastest rate on record.
In London, where the Bank of England has faced criticism for not being as proactive as other central banks, the three-month Libor rate was set yesterday at 5.995 per cent, its highest of the year.
This is almost 0.9 percentage points above the level investors demand for risk-free money, a spread almost as high as that which led to central-bank interventions in September and December.
The European Central Bank allocated €216 billion in seven-day funds in its regular weekly operation yesterday - some €50 billion higher than the amount it estimated would have been needed normally - at an average rate of 4.28 per cent, which was the highest since late September.
The Fed's latest lending to banks under its term auction facility was also in heavy demand, receiving bids for $88.9 billion (€56.9 billion) compared with the $50 billion on offer, an excess of demand almost as great as the previous auction two weeks ago, before the collapse of Bear Stearns.
But equity markets ignored the continued stresses in the plumbing of the financial system, partly in the hope that they were driven by liquidity hoarding at the end of the financial quarter.
The Iseq ended up 2.7 per cent at 6327.55. The FTSE 100 gained 3.5 per cent, closing 193.9 points higher at 5,689.1, while the FTSE Eurofirst 300 rose 3.1 per cent to close at 1,266. Japan's Nikkei 225 closed up 2.1 per cent while the Hang Seng in Hong Kong rose 6.4 per cent. The rises came after strong gains on Monday in the US, following the revised JP Morgan offer for Bear Stearns.
In mid-afternoon trading, the S&P index was also up 0.37 per cent, with its earlier gains pared by further evidence the credit crisis risks sending the US into a deep recession. Consumer confidence crumbled to a five-year low in March and US home prices experienced a record slide in January. - (Financial Times service)
