Money markets ease again but recovery remains muted

Tensions in the money markets eased again yesterday, suggesting that the co-ordinated global attempts to tackle the credit crisis may finally be having some success though, as with world stock markets, the improvement was marginal.

Libor, the rate at which banks lend to each other – and thus considered an important measure of the logjam in the credit market – fell for three-month lending in all currencies, the British Bankers Association said, but the reduction was small. The three-month sterling Libor rate, for example, fell from 6.27 per cent to 6.25 per cent.

Indicators of perceptions of risk in the money markets, such as the Libor/OIS index and the TED spread also fell yesterday.

However, Zach Witton, an analyst at Moody's ratings agency, said: "Tuesday's easing is welcome news, but money market rates remain high."

There has been come disappointment that pledges by European governments to flood the system with €2trn worth of loans, guarantees and equity has not yet had more dramatic results. The impact of the US's $700bn rescue plan has been similarly modest.

However, Padhraic Garvey, a strategist at ING bank, said: "Every day that Libor falls is a better day for the banking system – I don't think we will get a complete resolution to the Libor story for some time, but I would take a couple of basis points every day."

Gains on world stock markets were similarly muted. London's FTSE 100 index rose by a little more than 3 per cent yesterday, having been up by more than 5 per cent at one stage. The Dow Jones index in the US opened 400 points higher, almost 4 per cent up on the day before, but later fell back and the industrial average closed down 76.6 points at 9,310.99.

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