GOVERNMENT INTERVENTION in European financial markets is beginning to reap real rewards, as the cost of borrowing for banks fell to its lowest level yesterday since before the collapse of Lehman Brothers.
The London inter-bank offered rate, or Libor, which is the borrowing rate that banks charge each other, dropped 3 basis points to 4.96 per cent yesterday, the lowest level since September 12th, the Friday before Lehman failed. Moreover, the overnight dollar rate also declined, as it slid 23 basis points to 1.28 per cent, below the Federal Reserve's target for the first time since October 3rd
However, despite the fall in the cost of inter-bank borrowing, the majority of global markets declined yesterday on the back of disappointing earnings and lower forecasts. For once, the Irish market out-performed the trend, as it advanced by 4.5 per cent.
Ten of the 18 western European markets fell back yesterday. The Dow Jones Stoxx 600 declined by 0.5 per cent to 220.90. In Germany, reinsurance firm Hannover Re fell by 13 per cent after posting a loss, and the DAX finished the day down by 1.1 per cent.
In France, a € 10.5 billion injection into six banks, in the form of subordinated bonds, saw the CAC 40 close up marginally by 0.8 per cent. Banks Societe Generale and BNP Paribas performed strongly, closing up by 10 per cent and 7.5 per cent respectively.
French finance minister Christine Lagarde said that the move was indispensable if banks were to be "in a position to finance the economy properly".
The International Monetary Fund said more European banks may fail as they struggle to raise fresh capital from investors. In its annual review of the European economy published yesterday, the Washington-based lender said financial markets are now "paying increasing attention" to pure leverage rather than accounting for how risky it is.
By that measure, Europe's banks score less favourably than those in the US, it said. As sovereign wealth funds and investors show diminished appetite for putting money into banks and volatile markets make it hard to raise capital, Europe's financial institutions will find their ability to raise funds falling and the need for government support growing, the IMF said. "While recapitalising initially went well, it is now likely to slow," it said in the report.
In the UK, the FTSE 100 fell for the first time in three days, giving up 52.94 points, or 1.2 per cent, to finish down at 4,229.73, as bank stocks including HSBC and RBOS fell.
US stocks fell more than 2 per cent as companies cut their earnings outlooks and automotive stocks pulled shares lower.
In Hong Kong, the Hang Seng Index closed 281.84 points lower at 15,041.17 after opening 1.9 per cent higher.
In the US, poor earnings results saw indices fall. By 11.59am, the SP 500 had lost 24.16, or 2.5 per cent, to fall back to 961.24, while the Dow Jones Industrial Average slipped 187.25, or 2 per cent, to 9,078.18.
The euro fell to a three-year low against the yen yesterday, on speculation central banks will lower borrowing costs to limit the global economic slump, encouraging investors to sell higher-yielding assets funded in Japan. It also dropped to a 19-month low against the dollar, on bets the European Central Bank will cut interest rates at a faster pace than the Federal Reserve.
By 10.52am in New York, the yen had appreciated by 2 per cent to 133.25 per euro, while the euro fell by 1.2 per cent to $1.3188 from $1.3344, after touching $1.3154, the lowest level since March 2007. - (Additional reporting Bloomberg)
