Borrowing costs for banks fell for the second week running after co-ordinated central bank action helped unfreeze the money markets. But the credit crunch continued to take its toll as banks offered big discounts to offload leveraged debt.
Interbank lending rates, used by banks to lend to each other, have been falling since early December after the Bank of England and other major central banks joined forces to inject billions of dollars into the financial system.
The three-month inter-bank rate for sterling loans dropped to 6.01750 per cent yesterday from 6.04625 per cent the day before. The rate has fallen steadily since 12 December, when the central banks announced plans to pump more than 50bn of three-month money into the system before the end of the year. The cost of borrowing three-month euros and dollars also fell. Banks are still struggling to offload debt for leveraged buyouts that is stuck on their balance sheets after investors boycotted the loans as fear gripped markets. Major banks such as Citigroup and Goldman Sachs were reported to be offering discounts of up to 10 per cent to clear a $231bn backlog.
"The market can absorb all of these deals. It is a question of time," John Eydenberg, Deutsche Bank's head of leveraged finance for the Americas, told the news agency Bloomberg.
The Bank of England, the US Federal Reserve and their European and Swiss counterparts announced their unprecedented concerted action on 12 December in an attempt to restore confidence to the money markets. Lending between banks had frozen as banks worried about counterparty risk caused by potential losses from the sub-prime crisis. The central bankers took the joint action because they were worried a lack of credit would cause the turmoil in financial markets to pull the world economy into recession.
But money market rates have not fallen back to the levels of July, before rising defaults on US sub-prime loans rocked confidence in the debt markets that had sprung up during years of low interest rates. Concerns continued to haunt the financial sector yesterday as predictions of further big write-downs by US banks hit Britain's banking stocks.