THE OLD LADY & THE MONEY MARKET CRUNCH
[Latest Global Dollar Liquidity Measure: +14.8% annual growth rate; latest Endogenous Liquidity Index: -27.7%]
Liquidity watchers and analysts are abuzz with the situation in the money markets. Gillian Tett, the very able Financial Times reporter, describes the crisis as a "frantic scramble for liquidity". She mentions the L-word no less than six times in today's piece [HT: Robert]. Steen Jakobsen, the rather bearish Saxo Bank fund manager, writes: "Destruction of capital is the name of game ... In all my life as a trader I have never seen anything like this. The stock market is in a total denial, the fixed income in near panic".
The most interesting statement came from the Bank of England, which raised its aggregate reserves target for the next month in a move to lower the overnight London interbank lending rate. However, according to the Financial Times, the Old Lady stressed "the move was not intended to bring down the three-month Libor rate, which hit a nine-year high of 6.8 per cent ... The persistent widening in the spread between interbank rates and the central bank’s policy rates reflected the difficulty in valuing risk and not a lack of liquidity, the Bank said".
The Daily Telegraph quotes the BoE's statement:
Spreads have risen significantly in all major financial markets since August 9, reflecting the difficulty in valuing a variety of asset-backed instruments, which has reduced liquidity in those instruments and also in term money markets. The source of these problems does, therefore, not lie in a lack of central bank liquidity.
Wow! This is getting really interesting.