New evidence of damage wrought by the U.S. mortgage sector surfaced in the United States and Europe today while banks demanded a record amount of cash at a euro zone money market auction.
Cheyne Finance Plc, a structured investment vehicle (SIV) managed by British hedge fund Cheyne Capital Management, said it was seeking to restructure after being forced to start selling assets to pay down debt.
Standard & Poor's downgraded Cheyne Finance sharply.
Just two weeks ago, the agency said ratings on SIVs -- including the Cheyne vehicles -- were weathering turmoil caused by defaults on U.S. subprime mortgage lending mainly to poor people.
British bank Barclays, hit by worries over its exposure to highly leveraged debt vehicles, holds collateral that would limit losses to €110.7 million at most, a source familiar with the matter said. Merrill Lynch, meanwhile, downgraded Bear Stearns Citigroup Inc and Lehman Brothers Holdings to "neutral" from "buy" on Tuesday and lowered estimates for the banks' earnings, due to credit and mortgage market troubles.
"The only thing that is certain is that more uncertainties in the direction of asset prices and volatility are on their way," Bank Julius Baer said in a report.
Euro zone banks bid for a record amount of money at the ECB's regular long-term funding operation today, reflecting ongoing tightness in the interbank lending market.
Central banks have poured funds into money markets to tackle a liquidity crisis, stemming from the subprime saga, which has made many banks clam up on normal interbank lending.
The European Central Bank lent out €50 billion for 91 days but with banks bidding for a total of €119.75 billion, strong demand pushed up the cost.
"There is still a huge premium for cash particularly in the three months area," one trader said. European Union officials were cautiously optimistic about the resilience of euro zone economic growth to a credit crisis but German data suggested wariness at the very least.
"Up to now we do not see any notable impact on the growth perspectives of the euro zone as a whole. But we will have to wait a few more weeks to draw up final conclusions," Luxembourg premier Jean-Claude Juncker, who chairs the monthly meetings of euro zone finance ministers, told reporters.
A survey by the GfK market research group showed German consumer sentiment was likely to worsen in September due to households' fears that market volatility may hurt the economy.
In the United States, mortgage applications fell for a second consecutive week, the Mortgage Bankers Association said.
Data on Tuesday showed U.S. consumer sentiment suffered its steepest plunge in nearly two years and a house price index posted the biggest drop in its 20-year history.
"Now the question is not so much where the losses are and how far the cancer has spread but how much of the business and consumer economy are affected," said Justin Urquhart Stewart of 7 Investment Management.