Published September 19, 2008

Sibor posts stunning jump before relief pours in

Central banks pump billions to ease borrowing costs; markets on a yo-yo


(SINGAPORE) Like a journey in the hills, stocks in Asia fell, rose and dipped again on a day when the world's biggest central banks injected billions into banking systems in a desperate bid to unblock interbank markets and bring down borrowing costs.

The move came after US-dollar interbank lending rates in Singapore saw their biggest jump on record, following similar severe dislocations in interbank markets in the United States and Europe earlier this week.

In a statement published at 3pm Singapore time, six of the world's biggest central banks - the US Federal Reserve, Bank of Canada, Bank of England, European Central Bank, Swiss National Bank and the Bank of Japan - said they would provide up to US$180 billion in additional funds to meet demand for US-dollar short-term loans worldwide.

The concerted attempt to ease borrowing costs came after interbank lending in some markets ground to a halt and interbank rates jumped to unprecedented levels as banks jealously hoarded cash and charged each other exorbitant rates to borrow funds.

Here, the one-month Singapore interbank offered rate or Sibor for US-dollar loans soared 48 per cent or 1.4 percentage points to 4.31 per cent yesterday morning before the intervention - its single biggest one-day jump on record and a stark indication of how the severe stress in financial markets worldwide is affecting even the interbank market here. On Monday, the rate was just 2.53 per cent.

Last night, the Monetary Authority of Singapore said the joint action by central banks yesterday afternoon appeared to have eased pressures in US-dollar markets, adding that it 'stands ready to inject additional liquidity' if needed.

The Sibor is fixed at 11am daily by the Association of Banks in Singapore based on quotes by selected banks on what they expect to pay for interbank loans that day. Domestic interbank rates for loans in Sing dollars also rose, but far less sharply.

The dramatic developments meant that retail investors - those that still had the stomach to trade shares - were taken on a dizzying ride, as Hong Kong's Hang Seng index plunged 7.7 per cent before staging a spectacular recovery to close flat after central banks in the US, Canada, Europe and Japan pumped a staggering US$180 billion into money markets to ease interbank lending rates.

The last time central banks took drastic action on such a large scale was in early March - when credit markets seized up, eventually causing investment bank Bear Stearns to topple.

Here, the Straits Times Index also staged an astonishing recovery, finishing virtually unchanged after plunging as much as 4.6 per cent earlier in the day.

In Japan, where trading ended before the official announcement of the central bank action, the Nikkei-225 index closed 2.2 per cent lower after falling as much as 3.8 per cent earlier.

Meanwhile, indices tracking the spreads on corporate credit-default swaps - a measure of the risk of the underlying companies defaulting on their debt - surged in Asia yesterday as investors sought protection from bank defaults on fears that more financial institutions would crumble.

In Russia, stock markets were shut most of the day - the third day of interruptions by trading suspensions to prevent a financial crash. The government said stock trading will resume today after it announced a slew of measures to restore investors' confidence in financial markets.

'There is no more important task for Russian authorities than supporting the financial system,' President Dmitry Medvedev told Russian ministers, according to AFP.

The US financial sector is facing a 'long workout' of past excesses - chiefly an over-reliance on debt - but not a complete meltdown, said Gerard Lyons, chief economist at Standard Chartered Bank, in a report yesterday.

'This deleveraging process still has some way to go, and requires a rebalancing of the economy. Private sector debt is still too high, and American consumers need to spend less, save more.

'Caution, not pessimism, is required in 2009.'