LONDON, Oct 8 (Reuters) - The British government's promise to gaurantee its banks' short-term interbank borrowings could be a template for Europe to follow, which would help unlock frozen money markets because it gives ailing banks a top credit rating.
After Ireland last week pledged to support its interbank market with a blanket guarantee to all banking liabilities for two years, Britain on Wednesday offered a guarantee to up to eight UK banks' new short and medium-term debt estimated to cover up to 250 billion pounds of new borrowing.
That was part of a broader package of measures aimed at shoring up the country's banking system that included capital injections of up to 50 billion pounds into banks and the Bank of England expanding its Special Liquidity Scheme of three-month money market liquidity provisions by 200 billion pounds.
But it was the money market move that caught the eye.
'This is the wow factor,' said David Keeble, head of rates strategy at Calyon in London.
The measures failed to bring down interbank sterling rates at Wednesday's British Bankers Association's fixing of London interbank offered rates (Libor), which came hours after the UK Treasury's announcement.
There was barely any move in sterling Libor across all maturities from overnight out to a year. Three-month sterling Libor was fixed at 6.27125 percent. See [ID:nL837191].
Bankers said they were waiting for more details on how the plan would work and also pointed out that the UK banks eligible only make up 5 to 6 of the 16-strong panels that contribute to the sterling, dollar and euro Libor fixings each day.
And that is one reason why the plan needs to get rolled out across other countries.
But if succesful and followed across Europe and beyond, many reckon money market tensions might finally start to ease.
'Some European countries may choose to follow the UK example. The more that do, the less risk of contagion there will be,' said Stephen Lewis, economist at Monument Securities.
Certainly, credit ratings firms Moody's and Fitch gave it the thumbs up.
'Subject to satisfactory terms, notably on timeliness of payment and duration, such facilities could receive backed short- and long-term ratings in line with the rating of the UK government and distinct from the unbacked short- and long-term debt ratings of the financial institution itself,' Moody's said.
The UK government said earlier that subject to further discussion with some eight banks -- Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Nationwide Building Society, Royal Bank of Scotland and Standard Chartered -- the proposal envisages the issue of senior unsecured debt instruments of varying terms of up to 36 months in sterling, U.S. dollars or euros.
It added that the guarantee would be issued out of a specifically designated government-backed company and that it sees the take-up of the guarantee to be of the order of 250 billion pounds.
'To qualify for this support the relevant institution must raise Tier 1 capital by the amount and in the form the government considers appropriate whether by government subscription or from other sources,' the Treasury said.
ALL TOGETHER NOW
British Prime Minister Gordon Brown called in a letter to leaders of the world's major economies on Wednesday for concerted action to guarantee inter-bank lending, a G7 source said.
He also suggested European Union countries should follow Britain's lead in making available to banks and financial institutions on commercial terms a government guarantee of new short and medium-term lending to assist in refinancing maturing wholesale funding obligations.
Brown urged the leaders of other Group of Seven nations -- the United States, Germany, France, Italy, Japan and Canada -- to issue 'a set of national guarantees to a broadly similar design' to restore trust in the global market for bank funding, the source said.
Brown said Britain had taken national action, in line with principles agreed by EU finance ministers on Tuesday, because the market for medium-term funding among banks was frozen across the globe with potentially grave economic consequences.
'Our scheme aims to restart the market by restoring confidence that loans to financial institutions will be repaid. This is an issue that affects us all. A concerted approach would address this problem,' he wrote.
Britain's pledge differs from Ireland's last week in that it's funded through the issuance of government debt and isn't a blanket guarantee of banks' liabilities.
There's no single Treasury authority serving the 15-nation euro zone or 27-nation EU.
But analysts said the capital injection and the interbank gaurantee could and should still be rolled out to other regions to defuse the international crisis in bank-to-bank lending.
'Such involvement by government is best carried out at arm's length: in Europe's case the EIB (European Investment Bank) may be a good vehicle,' said Avinash Persaud, chairman of Intelligence Capital. Keywords: INTERBANK UK tf.TFN-Europe_newsdesk@thomson.com ak COPYRIGHT Copyright Thomson Financial News Limited 2008. All rights reserved. The copying, republication or redistribution of Thomson Financial News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Financial News.
After Ireland last week pledged to support its interbank market with a blanket guarantee to all banking liabilities for two years, Britain on Wednesday offered a guarantee to up to eight UK banks' new short and medium-term debt estimated to cover up to 250 billion pounds of new borrowing.
That was part of a broader package of measures aimed at shoring up the country's banking system that included capital injections of up to 50 billion pounds into banks and the Bank of England expanding its Special Liquidity Scheme of three-month money market liquidity provisions by 200 billion pounds.
But it was the money market move that caught the eye.
'This is the wow factor,' said David Keeble, head of rates strategy at Calyon in London.
The measures failed to bring down interbank sterling rates at Wednesday's British Bankers Association's fixing of London interbank offered rates (Libor), which came hours after the UK Treasury's announcement.
There was barely any move in sterling Libor across all maturities from overnight out to a year. Three-month sterling Libor was fixed at 6.27125 percent. See [ID:nL837191].
Bankers said they were waiting for more details on how the plan would work and also pointed out that the UK banks eligible only make up 5 to 6 of the 16-strong panels that contribute to the sterling, dollar and euro Libor fixings each day.
And that is one reason why the plan needs to get rolled out across other countries.
But if succesful and followed across Europe and beyond, many reckon money market tensions might finally start to ease.
'Some European countries may choose to follow the UK example. The more that do, the less risk of contagion there will be,' said Stephen Lewis, economist at Monument Securities.
Certainly, credit ratings firms Moody's and Fitch gave it the thumbs up.
'Subject to satisfactory terms, notably on timeliness of payment and duration, such facilities could receive backed short- and long-term ratings in line with the rating of the UK government and distinct from the unbacked short- and long-term debt ratings of the financial institution itself,' Moody's said.
The UK government said earlier that subject to further discussion with some eight banks -- Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Nationwide Building Society, Royal Bank of Scotland and Standard Chartered -- the proposal envisages the issue of senior unsecured debt instruments of varying terms of up to 36 months in sterling, U.S. dollars or euros.
It added that the guarantee would be issued out of a specifically designated government-backed company and that it sees the take-up of the guarantee to be of the order of 250 billion pounds.
'To qualify for this support the relevant institution must raise Tier 1 capital by the amount and in the form the government considers appropriate whether by government subscription or from other sources,' the Treasury said.
ALL TOGETHER NOW
British Prime Minister Gordon Brown called in a letter to leaders of the world's major economies on Wednesday for concerted action to guarantee inter-bank lending, a G7 source said.
He also suggested European Union countries should follow Britain's lead in making available to banks and financial institutions on commercial terms a government guarantee of new short and medium-term lending to assist in refinancing maturing wholesale funding obligations.
Brown urged the leaders of other Group of Seven nations -- the United States, Germany, France, Italy, Japan and Canada -- to issue 'a set of national guarantees to a broadly similar design' to restore trust in the global market for bank funding, the source said.
Brown said Britain had taken national action, in line with principles agreed by EU finance ministers on Tuesday, because the market for medium-term funding among banks was frozen across the globe with potentially grave economic consequences.
'Our scheme aims to restart the market by restoring confidence that loans to financial institutions will be repaid. This is an issue that affects us all. A concerted approach would address this problem,' he wrote.
Britain's pledge differs from Ireland's last week in that it's funded through the issuance of government debt and isn't a blanket guarantee of banks' liabilities.
There's no single Treasury authority serving the 15-nation euro zone or 27-nation EU.
But analysts said the capital injection and the interbank gaurantee could and should still be rolled out to other regions to defuse the international crisis in bank-to-bank lending.
'Such involvement by government is best carried out at arm's length: in Europe's case the EIB (European Investment Bank) may be a good vehicle,' said Avinash Persaud, chairman of Intelligence Capital. Keywords: INTERBANK UK tf.TFN-Europe_newsdesk@thomson.com ak COPYRIGHT Copyright Thomson Financial News Limited 2008. All rights reserved. The copying, republication or redistribution of Thomson Financial News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Financial News.
© 2008 AFX News
