The global banking system was gripped by a worsening crisis of confidence yesterday as the leaders of the US Congress struggled to salvage the administration's $700bn bail-out plan."Congress must act," said President George W. Bush, expressing disappointment the government's bill was thrown out the previous day. "The reality is that we are in an urgent situation, and the consequences will grow worse each day if we do not act."
With leaders of both parties pledging there would be legislation in Congress this week, senators were discussing bringing the bail-out plan before the upper house as early as tonight.
Although stock markets steadied after the savage sell-off on Monday night sparked by the failed vote, overnight interbank lending rates spiked to painfully high levels in the major currencies, with overnight dollar Libor leaping 4.3 percentage points to a seven-year high of 6.88 per cent.
The money market strains were exacerbated by the end of the financial quarter yesterday, a time when there is increased demand for funds and banks have to balance their books.
The language of bankers and analysts grew apocalyptic as they warned that the near total seizure gripping money markets could turn into widespread financial meltdown.
"This crisis of confidence seems grossly out of proportion with the albeit fragile fundamentals of the financial system and of the global economy," said Marco Annunziata, chief economist at UniCredit. "But it is now threatening to turn into a self-fulfilling run on the system which could trigger a global financial and economic meltdown."
Further signs of strain emerged in Europe when Dexia, the Belgian-French bank that specialises in local authority finance, received a €6.4bn ($9bn) cash injection from the Belgian, French and Luxembourg governments after its shares lost 30 per cent of their value on Monday.
Banks in Europe increasingly appeared to be conducting all money market operations through the European Central Bank as increased injections of funding were met with rapid increases in the amount of money banks were opting to put on deposit at the central bank. One senior liquidity manager at a large European bank said this was because almost no bank was willing to lend to any other.
| That's the key evidence that that credit system is right on the edge of collapse, folks. |