Wednesday 26 September 2007

Wolf at the Door ?

Not so long ago we were reporting how Barclays and others were screaming for the Bank of England to pump liquidity into the system. Today the sorry tale went full circle: after much arm-twisting the BoE offered £ 10 billion of 3-month money to the markets at the ‘penal’ rate of 6.75 %. How penal is that ? Well, 3-month LIBOR peaked recently at around 6.7 %: so - not the kind of ‘penal’ interest-rate you and I recognize, (although obviously wholesale margins bear no resemblance to retail rates).

And how desperately was this liquidity needed ? yes, you guessed, not a single penny was taken. So – what the banks really wanted was a whole heap of cheap money. Now there’s a thing: we'd all have some of that !

The BoE has come in for its share of stick recently, but in the intolerable circumstances and on balance, I reckon it’s played a clever hand. Tonight the egg is on other faces.

And when one day the wolf really is at the door, how will we know ? One thing’s for sure: you wouldn’t trust Darling or Brown to be able to tell.



CityUnslicker said...

Funny that. One reason maybe though that they have all watched in horror as NR collapsed.

Having seen the effect no oneelse seems to want matron's medicine.

The end of the mmonth is coming up though and the next 5 weeks will show whether we have a depression or a mild headache.

Anyone seen if the banks have figured out a way of re-starting the commercial paper market? My guess is they are doing this all in Europe at the momentm but I have not had time ti find out.

Another fine post Nick.

Jeremy Jacobs said...

Do you think we're in for a rough ride for the next 6 months?

Mark Wadsworth said...

Don't be daft, The Goblin King and The Badger ARE the wolves at the door.

Nick Drew said...

JJ - Not sure anything as specific and dramatic as NR will happen again within 6 months (though it can't remotely be ruled out) but there are tough times ahead IMHO. Look at food prices, for starters (and entrées!) (sorry)

Who knows what the next flashpoint will be, in conditions of such widespread and increasing stress ? There will certainly be casualties, corporate and otherwise. Care to predict any yourself, JJ ?

BTW, we plan to run a feature here on Stress-Testing in the next week or so.

Mark - the Badger looks pretty toothless to me !

M said...

I get the feeling that the banks actually wanted something a little bit more under the radar. They don't mind a helping hand from the Gov, they just don't want confidence in them eroded by anyone knowing that they're being given that helping hand.

Old BE said...

the banks actually wanted something a little bit more under the radar

No doubt! Wouldn't everyone? My bung from the BoE has still to come through but my neighbours will be annoyed when I am a millionaire and they are not through no fault of their own.

The Bank has been wily again - you can have the dosh but by taking it you admit you're in trouble and watch your share price tumble. Much better for the Bank to encourage normal lending to resume at higher rates...

Anonymous said...

Hmm, can't say I see the reasoning behind this at the mo. You see, as mjw has pointed out, if anyone took the BoE up on the offer they would be committing financial suicide, essentially volunteering to go down the NR route. Can you imagine any board of directors of a financial company volunteering to end up on the BBC explaining why they have screwed up the company they are supposed to be running? After all, it isn't THEIR company - they are only running it for the shareholders who in any case would not be best pleased if the share price fell like NRs share price has fallen.

My guess is that much as the BoE would like to help companies in trouble, the fact is that EU rules prevent them doing so quietly, so whether the lenders are in trouble or not we won't now see anyone going to them for cash. The NR fiasco has demonstrated the dangers of going down that route and made such an escape impossible.

Mark Wadsworth said...

There is a simple answer to all this.

Nick Drew said...

MJW, Ed, Anon - an excellent discussion, thanks for dropping by. Later today I'm going to take a look at the 'financial suicide' angle.

Have you seen Private Eye's take on this ? - In the City, penned by, erm, Slicker (no relation). Slicker (Michael Gillard) has a tremendous ability to bring the historical perspective to bear - always a valuable input in this age of teenage bankers + politicians, & short memories.

Does anyone know for sure whether liquidity literally dried up, or whether LIBOR just went too high for comfort ? I'd be utterly, utterly amazed if large banks couldn't borrow at any price. If I'm right, it's *just* a matter of the spreads - and there is every reason to expect widening spreads in times of uncertainty. This isn't market failure, it's the inevitable friction (= cost) when the disfunctionality in McBroon's daft 'tripartite' regulatory regime becomes manifest.

Of course, banks have every reason to be annoyed about this - as do we all ...

Nick Drew said...

Mark - there's a job for you !

(... come the revolution)

Nick Drew said...

BTW, a propos of CU's opening comment, just noticed that Alliance & Leicester and Bradford & Bingley managed to get some corporate paper away: £450m and £500m respectively in the past two days, according to this:,,2177907,00.html

Business as usual ?

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