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Prospects daily: International inter-bank borrowing costs surge

Global Macroeconomics Team's picture

Important developments today:

1.  Credit market conditions deteriorate

2.  Home sales in U.S. increase in April

3.  South Africa's economy grows 4.3% (y/y) in the first quarter


Credit market conditions deteriorate. As concerns over stress in the banking system on both sides of the Atlantic mounted amid lingering worries over the euro-zone debt crisis, the cost of inter-bank borrowing for three-month dollar funds jumped to the highest levels since July last year. The three-month London interbank offered rate, or LIBOR, for dollar funds increased to 0.50969% this morning from Friday’s 0.49688%, the first movement above 0.5% for almost 10 months. LIBOR has now increased for a 12th consecutive week and more-than doubled over the course of the year to date. There is mounting evidence that some banks are facing stress. Investor anxiety about the health of European banks was underscored by news over the weekend that the Spanish central bank had decided to seize control of a regional saving bank, Caja-sur.

Meanwhile, the difference between 3-month dollar LIBOR and the Overnight Index Swap (OIS)—an important gauge of market stress—widened to 27.9 basis points (bps) today from 26.6bps Friday. Forward spreads point to a further widening, as Libor is likely to remain at elevated levels in the near term. Analysts note that heightened uncertainty about the euro-zone debt crisis has prompted demand for dollars, and made banks reluctant to lend each other, dampening the effects of a series of measures announced by global authorities to alleviate funding pressures. Such pressure has also been exacerbated by regulatory reforms in the United States, which analysts say could cause rating downgrades of large banks and raise borrowing costs.


U.S. Economist’s Group sees growth in the country at 3.2% for 2010-2011. A survey of members just released by the National Association for Business Economics (NABE) says that the U.S. recovery will be stronger than previously estimated. The panel boosted their earlier view for 3.1% GDP gains for 2010 up by a tenth of a point, as stronger payrolls and consumer spending will be the factors driving the economy in the near term. The outlook brightened even as concerns over the European debt crisis mounted, with the hope that financial contagion avoids U.S. shores. Gains in business investment will be another boost to the economy, with spending on equipment and software much higher, supported by better business earnings.


Source: National Association of Reators

U.S. existing home sales jump in final month of federal tax credit. Purchases of previously owned homes surged to a seasonally adjusted annual rate of 5.77 million units in April, up from 5.36 million in the previous month, as consumers rushed to take advantage of the now expired $8,000 federal tax credit for home purchases. According to the National Association of Realtors, the last time home sales were as high as April’s rate was November 2009, the initial deadline for the tax credit, when sales moved up a 6.49 million annual pace. The number of homes sold may hold up until June, since purchases that are closed by June 30 are eligible for the tax credit, and may well be underpinned by the recent drop in domestic borrowing costs, which stood at a five-month low 4.84% for conventional 30-year fixed-rate mortgages at the end of April.

It is important to note, however, that the extension of the federal tax credit was not able to generate as much demand as the initial phase of the program, with April’s 5.77 annual pace well short of November’s 6.49 pace. In addition, the supply of previously owned homes on the market increased by 12% (m/m) to 4.04 million, the highest since July last year, indicating that unless there is a dramatic pick up in home sales, average home prices are likely to remain low this year. The Commerce Department’s report on new home sales later this week will help provide a rounder picture of current conditions in the housing market.


Among emerging markets:

In South Asia, Pakistan’s central bank kept its key interest rate unchanged at 12.5%, as the economy is suffering from high inflation and falling investment, while confidence is being undermined by terrorist activity. Pakistan’s policy interest rate remains one of the highest in the world.

In Central and Eastern Europe, the IMF raised Lithuania’s GDP growth projections for 2010 to 2%, up from 1.6% previously, on an anticipated stronger export rebound. This contrasts with a government projection of 1.6% growth, and is among the more optimistic forecasts among major institutions and analysts.

In Sub-Saharan Africa, South Africa’s GDP expanded at a faster pace in the first quarter of 2010, growing 4.3% year-on-year according to the median estimate of a Bloomberg poll of economists. This would represent an increase from 3.2% in the fourth quarter of 2009, and the fastest growth pace in a year-and-a-half.

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