Interbank rates ease, but recession looms

Interbank rates in Asia have come down considerably, but recession remains a threat and the risk of high-profile defaults is becoming a reality.
Asian interbank rates have continued their decline this week after billions of dollars were pumped into the banking system by US, European and Asian governments, but the action may not be able to stave off a global recession.

In Hong Kong, the three-month Hong Kong interbank offered rate was quoted at 3.23% on Thursday, slightly higher than WednesdayÆs 3.14%, but much lower than last FridayÆs 4.19%. Likewise in Singapore, the three-month interbank rate for US dollars slipped to 3.63%, the lowest in four weeks. The three-month London interbank offered rate for US dollars, better known as Libor and considered the benchmark of interbank rates internationally, was trading at 3.53% on Thursday, down sharply from MondayÆs rate of 4.05%.

ôThe credit situation is improving and spreads are coming down [in Asia],ö says Nader Naemi, senior investment strategist at AMP Capital Investors. But Naemi says the joint efforts by governments were still not adequate to stave off a recession in Asia and globally.

He says TuesdayÆs announcement by the US Federal Reserve that it would provide an injection of as much as $540 billion into the banking system to help alleviate the liquidity crunch was having an effect. Likewise, the French governmentÆs announcement that it would inject Ç10.5 billion ($13.6 billion) into six banks, including BNP Paribas and Societe Generale, had helped credit concerns in France.

While the concerted efforts are expected to release much needed liquidity in the global interbank market, some governments are still being forced to seek help from international lenders to avoid a debt default. On Wednesday the Pakistan government said it is approaching the International Monetary Fund to seek financial help to prevent it from defaulting on its debt obligations.

The move by Islamabad came at a time when its foreign exchange reserves fell to a six-year low of less than $8 billion û barely adequate to meet the nuclear-armed Islamic republic's imports for one-and-half months. The impoverished nation is also approaching other Western and Gulf donors for rescue packages. PakistanÆs foreign reserves sank from $14.3 billion in June 2007 to $4.7 billion in September 2008. Also, the Pakistani rupee has lost 25% of its value this year and the stockmarket has dropped 35%.

Meanwhile, an announcement by ArgentinaÆs government on Wednesday saying that it plans to nationalise $29 billion of its pension funds, sent shivers down the spines of international lenders as it was seen to raise the spectre of another default from the Latin American country û its second in a decade.

Compounding the already gloomy international credit situation was a report released by Fitch ratings, which said the financial crisis will halve the real growth in credit this year as the global financial system is deleveraging. The Fitch report also pointed out that investorsÆ risk appetite will decline as the global economy slows.

With regard to Asian economies, the Fitch report was brutal on Korea, pointing out that the operating environment in the country has deteriorated with economic growth weakening, inflation rising and the won getting weaker.

Fitch also raised concerns about the increased short-term foreign currency borrowing by Korean banks, much of which is linked to hedging facilities provided by the banks to exporters and asset managers, as well as to arbitrage-related purchases of domestic government bonds by foreign banks.

Earlier in the week, the Korean government came out with a $130 billion package to rescue its banks. Of the total, $100 billion will go towards guaranteeing the foreign currency debts of Korean banks, while $30 billion is being pumped into the domestic banking system to increase liquidity.

The Fitch report also warned of pitfalls and dangers for Chinese banks this year and next. ôAn increasingly difficult operating environment looms for Chinese banks due to weakening global demand, rising inflation and a tighter monetary environment. There is increasing evidence of borrower strains and early signs of a rise in loan delinquencies, exacerbated by this yearÆs stockmarket crash, the cooling property market and tightening liquidity," the report says.
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